Conrad Murray, Casey Anthony, and the stock market
Conrad Murray was found guilty, while Casey Anthony was found not guilty. In my mind, there was plenty of evidence to convict both, but that's not what happened. In fact, after the Casey Anthony verdict, I thought there was a better than even chance that Conrad Murray would soon be free and practicing medicine again. There are two key investment lessons to be learned from the outcome of these trials.
Emotions drive decisions more than facts. Both verdicts were determined by jurors. As our supposed peers, they ultimately decide the reasonableness of a defendant's actions. But jurors are also human beings, and as such make some decisions based on fact and others on emotion. Though I'm no expert on either trial, I wonder whether Casey Anthony appeared more sympathetic than Conrad Murray. Did the jurors relate more to the young single mother than to the womanizing doctor portrayed as using Michael Jackson to improve his social life?
Only the facts and the law should have been at issue with both trials. That said, it's impossible for any human being to carve out emotion and only act on logic and rules. Similarly, the stock market is driven by a group of human beings called investors. And because investors aren't always rational, the stock market isn't either.
Despite knowing that the rules of investing dictate that we should buy low and sell high, investors will almost always do just the opposite and pile into stocks after they have surged only to panic and sell in a bull market. That we don't apply the rules in making investing decisions might give us a glimpse into the mindset of the Casey Anthony jurors and their decision that seems so irrational.
Recent past carries too much importance. As mentioned, I thought Conrad Murray would be found not guilty. I read about the expert witnesses who created some doubt as to whether Murray injected the propofol that killed Michael Jackson. While it didn't convince me, it certainly created more doubt in my mind than I saw in the Casey Anthony trial. From that, I reached a conclusion that Murray would also get off.
In examining my own logic, I anchored my thoughts on one very recent trial and extrapolated the one data point into the future. Obviously, this "recency bias" caused me to come to the wrong conclusion.
When it comes to investing, however, investors have the same recency bias. In bear markets, investors project lower future stock returns than they do in bull markets. Of course, neither good times nor bad times last forever.
My advice
Remember that financial markets are decided by human beings, just like trials are decided by juries comprised of human beings. You can't decide the fate of the stock market, but you can benefit by weighing the evidence and acting more logically than other investors. Specifically, remember:
Expenses take from your return. Though it may make more emotional sense to hire an expert stock picker to outsmart everyone else's stock picker, it is illogical.
Emotions will rob you blind. Don't overweight the recent past and continue repeating the same mistake.
The jurors in both trials did not act in a completely logical manner, and I'm sure the attorneys on both sides worked to play to the jurors' emotions. Market experts do the same to investors.
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