Overconfidence Bias and November Returns
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By Ben Dolan
“Isn’t a near-term recession inevitable?” This question was posed to me by a fellow guest at a luncheon at the end of October and may have been on your mind as well. His pessimism was sincere, and his concerns were many: inflation has cooled a bit, but prices are still high, housing is not affordable for many, debts and deficits are out of control, the conflict between Israel and Hamas could spill into a broader conflict between the US and Iran, stock valuations are high compared to historical trends, credit card debt is at historic levels, etc., etc.
Without mentioning that I shared many of his concerns, I asked him how he defined “near-term” and how these realities might impact investors. He didn’t answer my question about what “near-term” meant with any specificity, but he did jump at the opportunity to share the impact to investors, and his next trade idea: “market declines will continue into November, so I’m shorting US stocks.” He stated his opinion as fact, while indicating that a good investor can make money in any market, up or down.
This gentleman was right about one thing, returns leading up to November were not good. According to Morningstar, the Vanguard Russell 3000(VTHR), an ETF designed to hold most of the US stock market was down 9.16% from August 1st through October 31st. By shorting the US market, he planned to profit off what he believed was an inevitable decline in markets for November. Unfortunately, he wasn’t just wrong, he was spectacularly wrong, with the S&P 500 having its second best November since 1980!
Below are the returns for the major indices for the month of November, as provided by Morningstar:
My lunch colleague suffered from overconfidence bias. He overestimated his knowledge, not considering that he may be wrong. I hope he made a small bet. After all, he is betting. And there’s a big difference between investing and betting. Gamblers bet. Investors own companies.
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Ben Dolan and Michael Foster are investment advisor representatives of Dolan Capital Advisors, Inc., a SEC-registered investment adviser. Investment advice offered through Dolan Capital Advisors, Inc.