"It Will Always Come Back", But Will It?

The Dangerous Concept of Selection Bias in Investing

Good day everyone!

I hope you are all having a good week so far. Today I want to talk about a concept that quietly sneaks into many investing decisions - Selection Bias.

According to Wikipedia, it is the bias introduced by the selection of individuals, groups or data for analysis in such a way that proper randomization is not achieved, thereby ensuring that the sample obtained is not representative of the population intended to be analyzed.

In a nutshell, it’s what happens when we focus only on data that confirms what we want to believe, and ignore the rest. In investing, this can be especially dangerous. It makes us feel like we’re being logical, when we’re really just reinforcing our own assumptions.

Let me give you an example.

Over the years, I’ve watched a number of stocks hit a certain price point, rally strongly, and then eventually return to that original price. When I missed the first opportunity to buy, I used to tell myself, “It’ll come back. It always does.” And for a few of those stocks, it did. I waited, it dropped back down, and I got in.

But here’s the problem: I was only focusing on a select few that did come back. I wasn’t thinking about the many that never did, or those that kept climbing and never looked back. That “it’ll always come back” belief was based on a narrow set of examples that just happened to confirm my bias. That’s classic selection bias.

Selection bias in action: waiting for MSFT to ‘come back’ 5 years ago

When we only pay attention to the outcomes that fit our narrative, we risk making rules based on exceptions. We start to believe we’re seeing patterns, when in reality, we’re just picking and choosing the data that supports what we want to believe.

A few takeaways I’ve learned (sometimes the hard way)

• Don’t confuse a few experiences with a universal truth. Just because a handful of stocks came back to their price point doesn’t mean all will. Many never do.

• Missing out isn’t always a second chance waiting to happen. Some opportunities pass and don’t return. Don’t let hope cloud your judgment.

• Biases feed procrastination. “I’ll wait until it comes back” sounds logical, but it often comes from fear or indecision more than strategy.

• Valuation matters more than price anchoring. Focus on what the business is worth today, not what it once traded at.

• Stick to your process. If the business is solid, undervalued, and fits your strategy, take action. Don’t wait for a ‘perfect’ moment that may never come.

The truth is, we’re humans and are prone to these emotional shortcuts. Being aware of them is the first step to better investing. Because while hindsight is always crystal clear, it’s the decisions we make looking forward that shape our results.

I hope this gives you something to think about as you continue building your edge. Also on a totally unrelated note, be sure to smile today :)

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Till the next post, ciao!

Patience builds wealth,

Bjorn