Learn the stock market › Market psychology › Lesson 4 of 6

What is hindsight bias in investing?

Short answerHindsight bias is the feeling that you should have known, once you see how things turned out. In the stock market it makes yesterday's winners look obvious. Among the 15 largest US companies with prices since 2006, two of the five best since 2016 had also been among the five best from 2006 to 2016. Pure chance would have given about 1.7.

What is clear afterwards

When a stock has risen tenfold, reasons are easy to find: a good product, a skilled management, a growing market. Afterwards it feels as if the signs were there all along. But the same signs were there in companies that did not rise, and nobody remembers those.

The winners, then and now

These are the best companies since 2016, with their rank among the same companies in the ten years before:

Company	Since 2016	Rank since 2016	Rank 2006–2016
Nvidia	106.7×	1	5
AMD	64.5×	2	15
Eli Lilly	21.4×	3	11
Apple	13.5×	4	4
Microsoft	9.9×	5	8
Costco	8.7×	6	6
Alphabet	7.2×	7	7
Amazon	6.6×	8	2
Mastercard	6.5×	9	3
Walmart	6.4×	10	13

The 15 companies with prices since 2006, with dividends. The rank is among them.

Nvidia turned money into 107 times as much since 2016. AMD was ranked 15 of 15 from 2006 to 2016, at −67%, and still made the top five afterwards.

The five best from 2006 to 2016 were Netflix, Amazon, Mastercard, Apple and Nvidia. Since 2016, Netflix came in at number 12. Anyone who picked the last ten years' winners in 2016 got a mix. Of the five, two made both lists, and chance would have given about 1.7.

Why it matters

Hindsight makes it look easy to have picked right, and so easy to pick right next time. It also makes your own mistakes look foolish afterwards, even when they were reasonable with what you knew then.

The companies in the table are today's largest. Companies that were large in 2006 and then dropped off the list are missing, which makes the winners even easier to point out afterwards. How results spread when you own one, five or twenty companies is in the lesson on spreading risk.

Test yourself

A stock has risen tenfold in ten years. What does that say about the next ten?

More figures are on the page for AMD.