Captain Hindsight, and the rest of the gang — Could’ve, Should’ve and Would’ve sound like great guys to have around. They make us feel smart — I knew that would happen — and in control of a chaotic world. Not only that, they help us predict the future.
However, when it comes to investing, they are not as helpful as you might think. Here are five reasons you should banish Captain Hindsight and the gang from your mind.
1) You don’t even know he’s there.
When you got to the end of episode seven in Line of Duty, were you one of those people who turned round and said I knew Hastings was a wrong’un all along? If you were, then chances are Captain Hindsight (Captain H) was sitting on your shoulder telling you that you always knew it. That’s how Captain H works; once you know the answer to something, it becomes easy to think that you’ve always known it. Be careful! This is the first step towards Captain H’s world of bad investment decisions.
2) He gives us a false sense of confidence.
By allowing us to think we always knew the answer and we understand the cause and effect, we soon reach the point of ‘Hey, I understand how this stuff works’. Captain H wears a red cloak but he clothes his followers in the impenetrable armour of — entirely misplaced — self-confidence. This has two effects. Firstly, we’re likely to make bigger bets, involving more money. Secondly, as we understand ‘how stuff works’, we’re likely to take bigger risks. Now we’ve reached a point with more money involved and bigger risks taken, with no more understanding or insight, just more confidence. What could possibly go wrong?
3) He makes us oversimplify explanations.
The world is a complicated and messy place. The same is true for investments, the choice can be bewildering and the factors that influence performance are often difficult to understand. Don’t panic, one of Captain H’s best tricks is he helps us make sense of all this confusion. He allows us to look back at the results and search for evidence or reasons to validate it. The simplest explanation is one that has clear cause and effect. As soon as we find a couple of corroborating reasons that fit the result in a neat cause and effect pattern, we stop searching. However, failing to look at all the factors at play means we underestimate the complexity of events that led to a result.
4) He makes us repeat the same mistake.
Thanks to Captain H, our whole understanding of what happened in the past is wrong. We have over simplified and focused on a convenient cause and effect pattern. This means we have missed the real causal reason why things happened and made mistakes as a result. When the same set of circumstances arise again, they won’t register as dangerous on the mental radar. It will not give us any reason to consider or pause as we didn’t see it as a risk factor in the past. If we had identified the true cause of the loss the first time around, it would be easier to avoid it again. However, we missed it because we followed Captain H instead, and ended up repeating the same mistake.
5) He makes us miss what is in front of us.
Too much focus on the past means we can miss new opportunities. Yes, we need to understand the reason why something happened. But, as conditions change around us, we need to be more mindful of what’s happening now, rather than what happened before. It may sound like a cliché but past performance is no guarantee of future returns.
For more hints and tips on sustainable long-term investing visit our guides.
Captain Hindsight is a South Park character: https://www.southparkstudios.co.uk/
