Don’t dwell on the past, look in the future - April 08, 2020

Don’t dwell on the past, look in the future

Legendary investor, Warren Buffet is famous for not looking back at his past mistakes for too long. He goes on, even if oftentimes that’s easier said than done. There’s psychological reason behind all this, most notably we want to make sense of the world, even if sometimes there’s none. It’s natural but thinking too much about what happened may be counterproductive. Especially at times like these with the COVID-19 pandemic.

 “I don’t dwell on them at all. I don’t look back,” this is what legendary investor Warren Buffet said about the mistakes he made. He knows what he talks about as Oracle of Omaha himself made serious investment errors in the past. First, he didn’t realize the importance of Google at the time of its IPO: he was way behind the curve with the search engine. Another huge mistake on his part was misjudging Amazon’s chance to disrupt the retail sector. But he also knows that thinking about the past doesn’t help investments.

Hindsight bias

Letting go of the past isn’t always easy. Especially after seeing stock markets fall like they do since the coronavirus pandemic has started. But there are explanations. First, there’s a scientifically proven phenomenon called “hindsight bias”. This means that after something (bad) happens, people tend to say to themselves “I knew it all along”. “The problem is that too often we actually didn’t know it all along, we only feel as though we did”, writes Association for Psychological Science about this phenomenon. The reason behind this is that we remember the past selectively and try to create a narrative that makes sense.

We “have a need for closure that motivates us to see the world as orderly and predictable”, they add. But sometimes this is not true, and things just happen unpredictably. As psychological scientist Neal Roese puts it: “If you feel like you knew it all along, it means you won’t stop to examine why something really happened”.

Focus on the future instead

The best possible way to cope with these problems might be to focus on the future. Or as Think Wealth Magazine puts it: don’t “dwell on past mistakes, and don’t get too caught up in checking prices every hour. It’s important that you stay focused on long-term performance when stock investing”. Because – as New York Times also underlines it – most people are on the market for long-term investments, not day trading. Therefore, what really matters is the 5-10-20-year performance of the stock market, not the day-to-day numbers of short periods.

Being stuck in the past has other drawbacks too. Although thinking about the past may have short-term advantages, psychology experts believe that “If you habitually ruminate over your earlier life, you may regularly be revisited by feelings of anger, guilt, resentment, sorrow, or shame. And such emotions are hardly productive. In many ways, they're downright toxic”. All these “woulda, shoulda, coulda” thoughts aren’t productive. Simply because one cannot change what has already happened.

Time instead of timing

What’s more, these emotions may hold people back from new opportunities or ruining current chances. As the aforementioned New York Times puts it, when writing about the effects of COVID-19 and the fall of stock prices: “wherever they [prices] bottom out and start rising again is likely to be higher than the average price you paid for your stocks over the past 10 or 15 years”. This is why acting too hastily during bad times may cause serious losses for investors as CNBC’s chart proves it:

If someone exited the stock market at the wrong time, they faced serious losses on a $10 thousand investment in the last 20-year period. Why? Because as The Atlantic puts it: “Timing the market is a game for professionals, not amateurs”. This means that it’s extraordinarily hard to predict when to enter and exit the market. The journal concludes what we often say too: “And study after study has shown that the old investment chestnut is correct: Time in the market beats timing the market”.

Therefore, looking forward with patience again beats emotional decision making.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving their personal investment goals on the long term.