Gambler's Fallacy

In 2005, something very strange happened in Italy…

Lots of people went bankrupt betting on the national lottery.

Here’s the thing though, there was actually method to the madness:

See, by early 2005, the number 53 hadn’t been drawn in Italy’s national lottery in a long time. A very long time.

So people started to think it was due - they thought it had to come up soon. It was inevitable, right?

So they started betting on it. Heavily. And soon there were reports of rising debts and bankruptcies across the country - loan sharks were making a killing, people were losing their life savings betting on number 53.

The media called it 53 Fever.

By the time the number finally showed up in mid-2005, over €3.5B had been gambled and lost, family homes had been seized, and there were missing persons reports linked to unpaid loan shark debts.

So… what the hell happened here? And how’s it connected to your trading strategy?

Gambler’s Fallacy is the mistaken belief that the outcome of a one-off event is influenced by previous results.

In non-jargon terms, here’s what it looks like:

That’s what happened in Italy in 2005. People saw the absence of 53 as proof that it had to be drawn soon. But it didn’t. And it wasn’t.

Investors and traders make this mistake all the time.

I remember looking at NVIDIA back in February 2024 and thinking: that’s a steep chart - I’ll be disciplined and wait, a correction is overdue. Seemed like a solid plan at the time, until the stock went hockey stick without me. All because I thought a correction was “due”.

The reverse can happen with our losers. If a stock in our portfolio has been crushed, sometimes we think it’s primed for a bounce. So we hang on to it, and then it just keeps bleeding.

Point is: just because the price action has been one-way for a while, doesn’t mean it has to change because it seems like it’s “due”. I’ve learned that the hard way - Gambler’s Fallacy is no joke.

Let’s see if we can trade it.

What Goes Up Must… Keep Going Up?

Lot of folks out there saying AI, private credit (and the entire market) is a bubble. And they’re probably right - things are getting frothy out there: SPACs are back, and Iranian parliamentary speakers are warning of pump and dump schemes.

Going long tech, AI, or semiconductors right now seems like a pretty stupid trade... And that’s exactly why I like it.

Here’s what I’m thinking:

Lumentum Holdings Inc. (NASDAQ: LITE):

Lumentum is up almost 1,000% in the past year. That’s normally the type of chart that would scare me away. But this time, in accordance with the laws of anti-Gambler’s Fallacy, it’s triggering a buy order!

An actual thesis (if you’re into that sort of thing) would be that Lumentum provides the optical kit powering AI data centres, and as long as there’s anything left in the AI capex budget, the move may not be over.

Now might be a good time to go and reread the disclaimer at the top of this post.

But let’s see what happens.

There’s psychological traps everywhere in life. They shape how we think, how we make decisions, and spend money.

But enough of that - reading’s for nerds. Let’s gamify this:

💲💲You’ve got €5k to spend on only one of these investments. What’re you buying?

The answer - and the psychology behind it - will be revealed in the next edition.

Or you could just Google it now like a normal person 🤷‍♂️

Last Week’s Answer:

Last week’s trap (if you haven’t figured it out by now) was Gambler’s Fallacy. If you picked roulette colour Black, then congratulations - you’re human! And also fallible. Although in your defence, there was a 50% chance you were right...