Saturday Serendipity
Quote, Mental Model, What I read this week.
Hi there,
Reading time: About 3 minutes
Quote
“It is better to remain silent at the risk of being thought a fool, than to talk and remove all doubt of it.”
― Maurice Switzer, Mrs. Goose, Her Book
Mental Model
Gambler’s Fallacy
If a coin has landed on heads 50 times will you bet that the 51st time the coin will land on tails?
Most people would. But the reality is that every time the coin is tossed the odds are 50/50. So the 51st time also the odds will be the same. But we have a bias which makes us think that it has to land tails at some point.
The Gambler’s Fallacy is the mistaken belief that, if something happens more frequently than normal during some period, it will happen less frequently in the future, or that, if something happens less frequently than normal during some period, it will happen more frequently in the future (presumably as a means of balancing nature).
This fallacy also occurs in roulette game at casinos. We feel that red is long overdue if there are many blacks.
In Life
There are many instances in our life where we think that because things are bad they cannot get worse. The most common thing heard is how can it get worse? In some cases it does turn out to be worse. The bad things are unexpected and unprecedented.
In Investing
Warren Buffet has a quote “when others are greedy be fearful and fearful when others are greedy.” Now this quote can be misinterpreted by people. For example recently Adani group’s stocks were down and everyone who was greedy now became fearful. Does this mean that you buy a lot of Adani stocks just because the stock has fallen drastically?
No you don’t. The companies fundamentals are worth questioning and the reason that people were fearful about that particular company was right.
When Warren Buffett said, “turnarounds seldom turn” he probably had gambler’s fallacy in mind.
Expecting that the future events will smoothen out the stock prices, just because it has been falling for ‘n’ continuous trading days, is an irrational way of thinking.
The thinking of heads is long overdue applies in investing as well.
What I read this week
That’s it for this week!
Enjoy your weekend!