In Markets Never Forget (But People Do), Ken Fisher demonstrates to readers how their memories play (often costly) tricks on them--and some simple ways to start improving their market-related memories, now. History never repeats itself perfectly, but if you can better understand how investors have reacted to past similar events, you can start learning to shape better forward looking expectations.
For example, in the book Ken shows how investors' memories can go haywire over market averages. Very commonly, investors believe that since over very long periods stocks average about 9% to 10% a year, an average annual return is a reasonable expectation each year. However, as Ken shows, average returns are, in actuality, unusual. This is something investors routinely forget fast. Annual stock market returns normally vary widely and annual returns close to the long-term average occur in just a small number of years.
Just one example of how investors frequently forget but markets never do: Almost uniformly for the first stage of a new bull market--the first year or even two--headlines claim, "No Bull!" or something similar. Many (maybe most) pundits don't want to look silly by being too optimistic. It's not a new bull, they say, but a counter-trend in a longer bear.
But fears normal bull market upward volatility (and yes, volatility can go up, too) is a bear market can occur at any point--and have through history:
Interestingly, people frequently think being cautious about a new bull market is prudent. They believe it's better to be wrong and too bearish rather than wrong and too bullish, even though history shows being wrongly bearish can be more harmful to long-term returns if you're growth oriented.
1 Alexandra Twin, "Recharging the Rally," CNN Money (03/26/2009), http://money.cnn.com/2009/03/26/markets/markets_newyork/index.htm (accessed 08/10/2011).
2 "Wall Street Runs Hot, Cold and Down," Chicago Tribune (12/28/1990).
3 Paul Jarvis, "Investors Ponder 'Peaking Pattern,'" Bangor Daily News (05/06/1985).