Markets Never Forget (But People Do): How Your Memory Is Costing You Money

In Markets Never Forget, Ken Fisher layouts out his argument for why we should all heed the past and study it, but know “this time it isn’t different.” From politics to recessions, by reviewing and studying history, patterns are more easily identified (although very rarely repeated exactly), and can be used as a guide for future investing decisions.

As Ken Fisher explains, “A great many things we think are new and different, we’ve had around for a long time.” And, “One concern some may have about this book is: Can the past predict the future? No, the past never predicts the future. But what the past does, in studying it, is allow us to see the impact of things in prior periods.”

Investors Frequently Forget, But Markets Never Do

In Markets Never Forget (But People Do), Ken Fisher demonstrates to readers how their memories play (often costly) tricks on them--and some simple ways to start improving their market-related memories, now. History never repeats itself perfectly, but if you can better understand how investors have reacted to past similar events, you can start learning to shape better forward looking expectations.

For example, in the book Ken shows how investors' memories can go haywire over market averages. Very commonly, investors believe that since over very long periods stocks average about 9% to 10% a year, an average annual return is a reasonable expectation each year. However, as Ken shows, average returns are, in actuality, unusual. This is something investors routinely forget fast. Annual stock market returns normally vary widely and annual returns close to the long-term average occur in just a small number of years.

Just one example of how investors frequently forget but markets never do: Almost uniformly for the first stage of a new bull market--the first year or even two--headlines claim, "No Bull!" or something similar. Many (maybe most) pundits don't want to look silly by being too optimistic. It's not a new bull, they say, but a counter-trend in a longer bear.

But fears normal bull market upward volatility (and yes, volatility can go up, too) is a bear market can occur at any point--and have through history:

• March 26, 2009: A financial services CEO warned, "This is a bear market rally, not something more."¹ Oops--it was something more. Globally, the bear market bottomed 17 days earlier and runs still as I write.
• December 28, 1990: "The market has generally adhered to our bear-market rally forecast since the September-October bottom."² Actually, the 1990s mega-bull market started in October--two months before this quote.
• May 6, 1985: "I still think the recession lurks . . . but continually falling interest rates could ease recession fears enough to cause a healthy bear market rally."³ The bull market that started in August 1982 would run through August 1987, pause for that short 1987 bear, then run to October 1990.
• And so on . . .

Interestingly, people frequently think being cautious about a new bull market is prudent. They believe it's better to be wrong and too bearish rather than wrong and too bullish, even though history shows being wrongly bearish can be more harmful to long-term returns if you're growth oriented.

¹ Alexandra Twin, "Recharging the Rally," CNN Money (03/26/2009), http://money.cnn.com/2009/03/26/markets/markets_newyork/index.htm (accessed 08/10/2011).

² "Wall Street Runs Hot, Cold and Down," Chicago Tribune (12/28/1990).

³ Paul Jarvis, "Investors Ponder 'Peaking Pattern,'" Bangor Daily News (05/06/1985).