Due Theory

I'm starting to see an increase in the number of articles, posts and news interviews discussing when the next recession will take place or when the next "bubble" will burst. Although they do not always specifically state it, most of their predictions are based on what I like to call the "Due Theory".

The "Due Theory" is used a lot by sports fans and sports announcers. For example, in baseball, you'll often hear something like, "This guy is 0 for his last 25 plate appearances, he is due for a big hit right here". Math and statistics, specifically, don't work that way.

If you are flipping a coin and it has landed on heads 10 times in a row what is the likelihood the next flip will also land on heads? It's still 50%. The previous outcomes have no bearing on the next flip. None. In fact, it is actually possible for the coin to land on heads 100 times in a row. You may need to flip it an infinite number of times for it to happen, but it is possible. Still, each subsequent flip has a 50/50 chance of landing on either side. 

The parade of bears and doomsdayers come out full force at every new market milestone. The rush to point out why this new high level is further indication of the end being near.

Oh, the NASDAQ climbed back to 5,000?

The bubble is going to burst!

Umm, what bubble?

But wait, the Dow crossed 18,000? 

That must be the top! Only downhill from here! 

Enough already. Maybe the market plummets the day I post this. Or maybe it doesn't. No one knows but to base a negative prediction on the mere fact an exchange or index hit some new high level is a waste if time. I admit traders may find something or see something that indicates to them they should make a move based on a stock or index breaking into new levels. But, for most long term investors it just doesn't matter.

Oh, and before any math geeks yell at me, I am well aware that it may be impossible to fairly toss a coin. You get my point, though.