Resisting Human Nature

Investors are handicapped in that they are human, and human beings have numerous innate traits that interfere with being good traders and investors. Two of the most self-defeating traits we possess are to project the future based on the recent past and our need for instant gratification. Projecting the future based on what has just happened occurs in all aspects of society. It is akin to flipping a coin six times and having all six flips come up heads. Although the chances of the seventh flip being heads is still 50/50, a majority of people would bet against tails based on the first six flips. We use some of this faulty logic to try to predict the weather. In the late 1970s, three straight years of "once a century" snowstorms rocked the Northeast. The New York Times, Time, Newsweek and other publications were predicting we were heading into the next mini Ice Age. It didn't quite turn out that way. Several major hurricanes slammed into Florida in 2004 and 2005. Stories ran that this was the new normal. People stocked up on generators, building codes were changed and if you installed storm shutters, it was indeed the "salad days." Only one major hurricane has made landfall since.

This predilection shows up in the equity market, too. What was everyone's favorite stock in early September? Apple (AAPL). Why? Because it had nothing but one success after another for five years and its stock went up consistently throughout that period. Since then, Apple has been one of the poorest performers in the market as sentiment has changed on the stock....356 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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