I hate statistics. Actually, being a nerd, i love statistics, meaning the actual numbers, such as the factory utilization rate, or the inflation rate...numbers like that. What I hate is statistically calculating the probable outcomes that could occur in the future; I just don't get it. You see, to me everything is either going to happen, or it won't. Plain and simple.
So, let's talk about something that relates probabilities and investing: gambler's fallacy. It occurs when you think something will happen (or not happen) based on a series of events. The fact is, each event is independent; past events have no bearing on the future. That's why at the bottom of all brokerage advertisements there is the disclaimer: past performance is not indicative of future results.
Many people make that mistake when it comes to investing. Just because a certain stock continues to go up for several trading days (or goes down) doesn't mean that it's time to sell (or buy) because the next event must certainly be in the other direction. There's no such thing of an event "being due."
For once, I understand statistics; they got it right!
So, what does all this mean to the investor? It means you go with your brain, not your emotions. If you thought the stock was a good purchase, stick with it. Even if it goes down, find out why. What's going on with the company that changed since you bought it? Is it the economy? Is it world events? Are these changes temporary? If so, the buy is still a good buy. If things have changed fundamentally, then it is time to reassess the situation and either continue to hold or...fold. Use intelligence, not emotion.
When was the last time you used emotions to make a decision and it turned out for the best?