vinhmen said:
The lesson? As in sports, sometimes you gotta ride the hot hand while it lasts.
How many decided not to chase Tech sector in 1995, when Greenspan declared irrational exuberance? True it did eventually crash and burn, but some on this board made their way to FIRE by continuing to ride the wave and getting off at the right time. Sure the timing is tricky, but - with a little luck - it can be very rewarding.
Whoa, Vin.
First, let's look at the
hot hand analogy. This paper expands on Gilovich's original claim ("There's no such thing as a hot hand") and postulates that the hot-hand phenomenon works on the court because the other players believe in it.
"Is the hot hand a fallacy or adaptive thinking? In a sense it can viewed as both, it depends on what question one thinks is the most relevant one to ask.
Why the hot hand wins is quite clear. The hot hand rule has no effect on the percentage of shots hit by a player and does not introduce any dependencies between successive shots by the same player, instead it leads to the player with the higher shooting percentage being given more shots. In effect, the hot hand increases the allocation parameter for the player with the higher shooting percentage."
In other words the heuristic works as long as people believe in it. So instead of basking in the warm glow of the "hot hand", in a theater of Greater Fools loudly proclaiming their faith I'd be edging toward the exit with a tight sell stop. Momentum investing can work but it's awful hard to sell when no one wants to buy. Timing is even more critical than you make it seem and most don't jump in soon enough or eke out the rise. When it comes to a retirement portfolio I don't want to have to count on "luck".
Second, I don't believe that very many people on this board made their way to FIRE by riding the wave and then adroitly stepping off. One poster regularly cashed in his company stock as soon as he could and for several years was routinely regarded by his coworkers as an idiot. Note that he didn't ride the wave, though-- he diversified. We're all dirty market timers to some extent but the vast majority of our holdings are long-term and not subject to momentum investing.
I think most of us got to FIRE by LBYM, DCA, & asset-allocation diversification. I think less than a handful of us did it by being brilliant momentum investors, although
Gary Smith is one shining example. In his case he worked his @$$ off to acquire his assets and I think he earned every penny, perhaps at an hourly rate below the minimum wage. But maybe the aggregate response of the other posters will tell us more about their FIRE approach.
I'm not saying that momentum investing doesn't work. I'm saying that it doesn't work for the vast majority of those of us who got to ER. The grass just isn't that green.