1 Simple Way To Avoid Getting Tricked In The Stock Market

Indulge me on a short experiment.

Say I flipped a coin eight times. Below, I have listed two possible head-and-tails sequences of my coin flips, one of which is the exact sequence I got (not telling you which just yet). Heads is recorded as “H” and tails as a “T”.

  1. T-H-H-T-H-T-T-H
  2. T-T-T-T-T-T-T-T 

Would you like to take a guess on what sequence I got for my coin flips? Which one is more likely? 

Revealing the truth 

If you weren’t fooled (small f!), you would realize that the answer is more mundane. The odds of getting the T-T-T-T-T-T-T-T sequence and T-H-H-T-H-T-T-H sequence are actually the same (I actually got the former, believe it or not!). But yet, most investors would likely collectively gasp if the sequence of T-T-T-T-T-T-T-T turns up. 

Something similar can happen in the share market as well. Take the SDPR STI ETF (SGX: ES3) for instance, a proxy to the market benchmark the Straits Times Index (SGX:^STI). Now, imagine if the SDPR STI ETF went up for eight days in a row. Gasp! There must be “something” happening, yes? 

The truth is, the short-term patterns which appear from one day to the next in the share market are mostly irrelevant. A problem can thus arise if the share market is able to trick investors into thinking that “something must have happened,” leading to investors harbouring thoughts that some trading action is needed.

Battling the irrelevant patterns     

There are acute similarities when it comes to our own share portfolios as well. Our individual shares that we own in our portfolio will move in different paces, and at different times. It would not make sense to compare relative movements, and agonize on why the share market is up, but your shares are down. 

One way to rid yourself of this day to day agony would be to simply remove the daily share market movement column from your portfolio tracker. In other words, stop tracking the daily price movements of the shares you own. When you think about it, the daily movement of share prices rarely gives you any important information at all as an investor in businesses. After all, it’s really just the change in share prices which happens during the time it takes for the earth to make one full revolution around its axis. Hardly useful information.

Foolish take away

When it comes to investing, learning investing concepts is easier than implementing your investment ideas. Foolish investors might be better served if they pay attention to the psychological tricks that the share market can play. But fear not, sometimes it could be as easy as removing the irrelevant information (daily share price movements in this case) that clouds your rational investing side.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.