The Gambler's Fallacy and the Stock Market

Imagine walking into a Las Vegas casino. The lights are flashing, the slots are dinging,

and the craps table is erupting with cheers. The energy is electric.

As you stroll past the tables, you notice a roulette wheel with a single open seat. You

take it, glance at the board, and notice that the last eight spins have all landed on red.

What’s your first thought?

Most people think, “There’s no way it can be red again. It has to be black this time!” So

you put $100 on black.

The dealer spins. Red.

Frustrated, you double down. $200 on black. Spin. Red again.

Now you’re desperate to win it back. You slide $300 on black. This time the ball lands

on… green.

You’ve just fallen victim to The Gambler’s Fallacy. The belief that past events

somehow influence the odds of the next one. In roulette, each spin is independent. The

odds of red or black don’t change just because the last eight spins happened to be red.

This same flawed thinking creeps into the stock market, especially when markets reach

new all-time highs.

When the market hits record levels after a downturn, many investors hesitate. It feels

counterintuitive to buy something at its most expensive point, especially when you

remember that just weeks or months ago, those same investments were “on sale.”

So they wait. Or worse, they try to short the market, betting on an imminent pullback.

But history tells a different story. The CFA Institute in 2023 did a study of the US stock

market that when you invest at a market all-time high has historically led the market

typically higher 12 to 24 months later.

As legendary investor Peter Lynch once said:

“Far more money has been lost by investors preparing for corrections, or trying to

anticipate corrections, than has been lost in the corrections themselves.”

In other words, trying to “time the market” is the real gamble.

Systematic investing and staying disciplined regardless of whether markets are at highs

or lows is where long-term wealth is built. That’s why the old adage rings true:

“It’s not about timing the market. It’s about time in the market.” – Warren Buffett

So, the next time markets are setting new highs, take a breath and remember, waiting

on the sidelines can be the most expensive decision of all.

Here’s to new highs whenever they may come.

Content in this material is for general information only and not intended to provide

specific advice or recommendations for any individual. All performance referenced is

historical and is no guarantee of future results. Stock investing includes risks, including

fluctuating prices and loss of principal.