Prices Have No Memory

Posted in: Economics, Just For Fun, Stock Market, Thought of the Week

Roulette is one of the most popular games at the casino. Every roulette table has a computerized screen above the wheel stating the number and color of the last ten rolls. The casino says that the purpose of this screen is to assist gamblers in placing bets by showing where the ball has landed already. However, we know this screen provides no value to the gambler and tells no indication as to where the ball may land in the future. This is known as “Gambler’s Fallacy”. It is simply meant to trick you.

This same logic can be applied when you are making investment decisions. A long term investment decision must be made by considering where a stock is going and not where it’s been. For instance, a $10,000 investment in Apple back in 2005 would have been worth approximately $156,000 in September 2012. What is the lesson here? Just like roulette, stock prices have no memory of the past.

Read this week’s Thought of the Week to find out what our investment committee has to say about “Gambler’s Fallacy”.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market.  Written by our investment committee at GFPC we find these thoughts to be informative and interesting.