The Insidious Nature Of Investing Hindsight

Many of my conversations with clients touch upon how they react to missing significant investment opportunities or selling profitable investments too soon.

Most of you are no doubt familiar with the investing woulda-coulda-shouldas. Unfortunately, those opportunities or mistakes only become clear with the passage of time or the “benefit of hindsight.”

Investing hindsight causes strong emotional reactions. The emotions involved are primarily negative, somewhere in the realm of pain and regret.

More worrisome is what I believe is hindsight’s insidious nature: it can subtly harm how you approach investing as well as your long-term well-being.

It helps to note that hindsight is a close relative of (or perhaps just a synonym for) “survivorship bias,” defined by Wikipedia as the “logical error of concentrating on the people or things that “survived” some process and inadvertently overlooking those that did not because of their lack of visibility.”


Who Wants To Be a Starbucks Millionaire?

The following is a long-term chart of Starbucks (SBUX) that recently made rounds on StockTwits:

sbux stock chart historical gains in hindsight

As you can clearly see, had you invested $10,000 in the Starbucks stock at their IPO in 1992, your investment would be worth about $1,500,000 today.

A blog post by Joshua Kennon from 2012 makes an even more compelling case. Had you invested $100,000 in the Starbucks IPO, your investment would have been worth more than $10 million twenty years later.

With the dubious benefit of investing hindsight, this seems like a no-brainer investment.

So, how many everyday investors out there are sitting on Starbucks millions right now? I do not know, but I would be surprised if the number was higher than zero.

The reasons why are simple.

Back in 1992 Starbucks was just one of several coffee chains vying for dominance and there was absolutely no information available at that time that would indicate Starbucks would go on to become the global giant within twenty years.

Furthermore, Starbucks was just one of several hundred companies to go public in 1992. I will let you do the number crunching, but I am reasonably sure none of the other IPOs from that year fared nearly as well. Many of these companies don’t even exist today.

If you were indeed looking to invest $10,000 in a hot IPO in 1992, the odds of you somehow singling out Starbucks, then investing ALL of your money in this offering, and finally faithfully holding for more than 20 years through all the ups and downs are less than the odds of winning the Powerball lottery jackpot.

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