“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”
-Mark Twain Pudd’nhead Wilson
It is human nature to believe that there is a way to find an individual investment that has little risk and is going to provide an above average return. The reason this belief exists in the minds of many investors is due to the fact that some stocks do outperform. Apple readily comes to mind, we see this and confirmation bias steers us to believe that we can pick the next winner.
Even worse, at times an investor does pick an individual stock that does very well. Then ,due to outcome bias, believes that they made the right decision. What they don’t realize is they had taken a tremendous risk and received a corresponding return. A good analogy for this is if you go to a Vegas roulette table, put all of your money on one number and win, you will have a huge return. Despite that return it was clearly not a good investment decision. It was a simply a combination of a huge risk and luck – gambling.
Unfortunately, for every individual stock that has outperformed, there are many that have lost money or gone to zero. This is the reason for diversification. You may not be able to brag about a 40% return over two weeks but will know that with a consistent investment plan in a well constructed portfolio, you can reach financial independence. This sounds better than gambling to me.
-Konrad Karwowski CFP®