Understanding Recency Bias: The Hidden Trap in Investing

Hello, Reader.

Picture yourself watching an NBA game with LeBron James playing exceptionally well.

He has just sunk six consecutive shots, and the game is tight. Now, he’s preparing for another jump shot.

What are the chances he’ll make this next one?

In basketball, there’s a concept called the “hot hand.” It suggests that a player who has made several baskets in a row has a better shot at sinking the next one.

However, this idea is a common misconception. The likelihood of James making his next shot stays constant, no matter how many shots he has hit before.

The belief in the “hot hand” illustrates what experts call “recency bias.”

If you’ve ever sat through an annual performance review, you’ll grasp this term. Typically, supervisors tend to remember your actions from the past month much more than your performance from nine months ago. Consequently, you’re more likely to be evaluated based on recent work rather than the entire year.

This bias can also influence your investment decisions.

In the investing world, “recency bias” arises when a stock exhibits momentum, whether rising or falling. If a stock price has increased over the last six months, it’s easy for investors to assume it will continue to climb.

Conversely, if a stock hasn’t gained value in six months, many think it’s unlikely to rise anytime soon.

On a larger scale, if it has been a decade since the last bear market, investors may feel it’s not imminent.

Yet, you don’t have to depend on market trends to decide which stocks to buy or sell. You can influence your future by leveraging the right tools.

This is why my InvestorPlace colleague Louis Navellier shared details about his effective quantitative tool during his “Day-After Summit” last week.

The trading system he discussed has outperformed the S&P 500 by a factor of 6-to-1 in back-testing since 1990. Currently, among the 19 open trades in the portfolio utilizing this system, 18 are profitable.

Investors who use this system can better navigate unpredictable market movements resulting from scenarios like the upcoming presidential election. They can also pursue unique short-term investment opportunities.

To find out more about this tool—and what to anticipate in the days following tomorrow’s election—click here.

Now, let’s review what we covered this past week at Smart Money…

Smart Money Roundup

Navigating the Chaos of the Current Market Landscape

InvestorPlace CEO Brian Hunt argues that we are living in an “Age of Chaos.” He attributes this to several major megatrends colliding in today’s world. In this special guest issue, Hunt elaborates on these “Chaos Agents” and how to effectively navigate them during this turbulent election period.

What to Expect Post-Election: Potential Market Turbulence

The potential chaos after the election could extend well beyond inauguration day. While promises from both candidates for spending and tax cuts seem beneficial in the short term, they may carry long-term consequences. Thomas Yeung examines historical market trends post-elections and their implications for the coming 6 to 12 months.

The Magnificent Seven: What Lies Ahead After Election Day

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