“This time its Different”
Gambler’s Fallacy is the tendency of an investor to believe that an event is less likely to reoccur in the near future as it has happened in the recent past.
Consider flipping a coin for example, if a coin has been flipped 20 times in a row and has landed on “heads” every time, a person with gambler’s fallacy is likely to believe that it will land on “Tails”. It makes sense, because if the outcome of flipping a coin was the same for the past 20 times, it must be about time for the other outcome to occur.
Investors too fall prey to gambler’s fallacy in many cases. For example, an investor might hold on to a stock that has fallen in many consecutive sessions because it seems like it’s time for the stock to get back up. Though, there are many variables involved, but holding on to a losing stocks just because you believe it will get back up someday is surely a gambler’s fallacy.
To avoid Gambler’s fallacy, investors must remember that history repeats itself, and that specific outcome taking place has no influence on the events that preceded it.
Buying a stock because you believe the prolonged trend is likely to reverse at some point soon is an example of irrational behavior.
Investors should rather focus on companies with sound fundamentals, and their valuation, in order to make successful investments.