Jim Grant 'Represents' Last Year's Winner

I noticed that Jim Grant recommended buying gold funds in the February 17th issue of Forbes. I assume he submitted the article about ten days before publication date, which means he almost caught the top of the gold market to the day. It's unusual that he would make such a call because Grant holds himself out as a particularly lucid thinker, an observer who stands apart from the crowd.

Recommending gold stocks in early 2003 is the equivalent of recommending Nasdaq stocks in early 2000: in 2002 the Amex Gold Bugs Index was up over 120%; in 1999 the Nasdaq 100 Index was up around 100%. Chasing last year's winner is an almost sure-fire way to get burned. An informed commentator like Grant should know that.

"Representativeness" is a behavioral finance term you should know: it's a mental shortcut that causes you to give too much weight to recent evidence -- such as short-term performance numbers -- and too little weight to the evidence from the more distant past. Grant should be aware of the dangers of this bias when he makes his recommendations.

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