Stocks and Race Horses

Aug 2017 //
Behavioral Finance

some investors seem to liken a stock to a race horse—if it has done well in the past, then it will likely do well in the future. Similarly, when stock prices fall—likely raising future returns from their lower starting points—many investors apply race horse reasoning and shun good bargains. Simply put, left to their own devices, average investors tend to buy higher and sell lower … This process isn’t just some theory about investor behavior. It is one of the most fundamental aspects of investment reality. To help get a handle on the impact of such behavior, mutual fund ratings firm Morningstar has coined a term—“investor return.” This is not the average return earned by a mutual fund over time, but rather the average return earned by investors in that fund.