"It was clear as day that would happen!"

von Stefan Heringer

The impact of cognitive biases on our investment choices is profound. Contrary to the idealized figure of the rational economic human, the stock market seldom sees such creatures; investors tend to make decisions based on emotions – of course, almost always without admitting it. Understanding the basic pitfalls of investor psychology is therefore no "beginner stuff" as some might suggest, but a topic even seasoned professionals should continuously revisit and take seriously.

That's why, over the next few months, we'll be looking at some of the cognitive biases that repeatedly lead to investment mistakes.

Today we are going to look at hindsight bias. Hindsight bias is the psychological phenomenon whereby people tend to judge an event as predictable in hindsight, even though there was a high degree of uncertainty before it happened. This is because, in hindsight, you usually feel like "I knew it all along."

Let's explore four seemingly sound but ultimately flawed theories:

1. Biontech: An Obvious Goldmine

In conversations, we regularly hear how easy it would have been to make money from the Corona pandemic. All you had to do was bet on the vaccine manufacturer Biontech and profit from the approval of a vaccine after its foreseeable breakthrough. Coupled with the comment: "Seizing such opportunities is what I expect from a good administrator". Unfortunately, there were many other companies working on similar vaccines that just didn't make it – consider Curevac. So, it was pure luck to get the right one at the beginning of the pandemic.

2. Apple: The Success Story Everyone Saw Coming

Apple is one of the most successful companies of the last few decades, and its breakthrough success with the iPhone is a foregone conclusion. Really? A good 20 years ago, the company was struggling to survive - not for the first time - and had massive problems. Without the success of the iPod, the company would probably not exist today. Similarly, no one could have predicted the triumph of the iPhone in 2007. Steve Ballmer, then CEO of Microsoft, was visibly amused before its release, saying: "Who's going to pay $500 for a phone with no buttons? At the time, the Blackberry was all the rage among professionals and a status symbol in corporate hierarchies - those of you who are older will remember it: mini screen and even smaller keyboard!

3. The Dotcom Bubble: An Inevitable Disaster

Of course, it is now clear to everyone that the New Market and technology stocks were bound to collapse in early 2000; it was only a matter of time. Valuations were utterly ridiculous, future growth prospects were illusory and the collapse was inevitable. So why did virtually everyone go along and get sucked in? So, why did virtually everyone remain blissfully ignorant?

4. Corona: Only a mild Flu Wave the Stock Market

It is argued that the pandemic was also only a temporary event, hardly relevant to the long-term economic effects and thus to stock market prices, so the quick recovery was foreseeable. Really? Then why did so many people who contacted us at the time panic about a global depression lasting for years and the complete collapse of global capitalism, and just want to get their assets out of harm's way? Their scenario: first the airlines, the catering industry and tourism go bust, then the banks, leading to a financial crisis that will make 2008 look like child's play. But the financial meltdown that will then hit us will be nothing compared to the potential collapse of the bourgeois order....

The future course of the capital market is uncertain - in retrospect there is always only one story to tell.

Whenever someone rants about past events and suggests that certain developments were inevitable and that one could have profited from them by making wise decisions, one should be suspicious. No one can reasonably predict the success of individual sectors or companies. No one can anticipate technological progress and its consequences; the same is true of social and political developments. Don't make the mistake of overestimating your own ability to make decisions - and above all, don't let supposed gurus tell you that they can do it better.

Humility in the face of one's own (in)knowledge is not widespread, and we are aware that this is an imposition. We understand that people expect their financial advisor to have exclusive knowledge about the future of markets and prices, which will give them more returns and security. Unfortunately, this does not work. A good adviser can only take responsibility for their clients' financial life planning if it is consistently evidence-based and therefore free of predictions. Making clients' futures dependent on one's own forecasts is not an alternative.

Best wishes,

Stefan Heringer
Forty-Nine Fee-Only Advisors

PS: Please feel free to send any questions, criticism or comments to nachdenken@neunundvierzig.com.

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27/06/2023