Thursday, March 14, 2002
Another post to the LA Forum:
Boris Kuperschmidt wrote:
There's a classic stock market advice scam. It goes like this: You take 512
randomly chosen suckers and send each of
them a mail message making a "free prediction" about the market. You tell
256 of them that the market will rise during the next week, and the other
256 that it will fall. It'll do one or the other.
Whichever it does, you forget about the other guys and never mail them
again. The ones you were right with, however, you divide again into
halves. 128 of them receive a letter saying the market will rise, the
other that the market will fall. And again, you drop half of them based on
Do this three more times, and you now have a group of 16 people that have
received five consecutive correct predictions ...
One of the 16 who got all five correct predictions doesn't see all the
other people who got
wrong ones; all he sees is five straight correct answers. Pretty
convincing, isn't it?
And I responded:
Right on, Boris! Our keyboard Rambo has blasted the bad guys right between
Essentially the same scam is practised by *any* financial institutions or
market tipsters who trade on a string of successes to advertise their own
superior forecasting skill. You might see some unit trust being commended
for beating the market six years in a row; but you'd expect 1 in 64
coin-tossers to do equally well.
In the same way, fund managers get bonuses and promotions on the strength of
their runs of luck. And the whole voodoo practice spreads the notion that
there's such a thing as having the skill to beat the market.
And why can't you beat the market? Because it's designed to make it
impossible. If some valid piece of evidence indicates to you that some stock
has a bright future, it will send exactly the same signals to many other
players in the market. The price of the stock will rise, and its
benefit/cost ratio will fall back to the general market level.
So do your own share trading, buying and selling completely at random, and
benefit from capitalist markets' long-term rise in share values, while
saving on fund managers' costs.