The Greatest Con on Earth.
“The trick is as follows. The con operator pulls 10,000 names out of the phonebook. He mails a bullish letter to one half of the sample, and a bearish letter to the other half. The following month he selects names of the persons to whom he mailed the letter whose prediction turned out to be right, that is 5,000 names. The next month he does the same with the remaining 2,500 names, until the list narrows down to 500 people. Of these there will be 200 victims (who think this guy can predict the market brilliantly by now). An investment in a few thousand dollars worth of postage stamps will turn into several million dollars (unwitting fools deposits who bought the story).” Then the Con Artist elopes with the money obviously.
Fooled by Randomness, Taleb, p146.
So what are the real two greatest cons as I see it?
(Feel free to rip me apart if you disagree – I can take it).
1. Ever seen “Boiler Room”, or “Wolf of Wall Street,” where cold calling stockbrokers target large numbers of marks with their HOT pick? If they are correct, they then re-call and re-call until they grab the whale’s investment and commissions. If they are wrong they simply disappear (sounds familiar to the above story right!?)
2. And I think this is even worse. Mutual funds have great fact sheets showing their performance against some benchmark, with confusing YTD numbers and tables that fool most people into believing some amazing fund manager is in place charging 1.5%, consistently beating the market, whilst also beating, or ignoring randomness. (You are sold the story that the picks matter – but remember Russian Roulette?).
But due to survivorship bias, the bad funds are never even seen, as they are gone. But the news is rarely shown, as are the size of the failures, or that if you invest now, whether that fund will exist in five years due to underperformance or not, as fund management companies don’t like to talk about those closures.
“Closed for subscription” is something I have seen several times (and owned)…. until the fund quietly fades into the night, or is rolled into another. The Fund Management Company might not mail or call you, as they are subtler. They simply advertise and promote the winning survivor funds – then net even larger numbers of people to join it.
In 2001-2012 – 7% of all funds failed every single year! That’s not just lost money, that’s FAILED.
ETF’s have also failed at a high rate, even in market growth conditions. And, fair enough, some of the ETF failures have been specific obscure ones, but at least the major trackers of a whole index or industry should be somewhat immune.
The following article I think gets it wrong though a little. “While some of the deaths are simply due to bad timing, closures help weed out weaker players and lead to higher-quality products.” Perhaps, but more importantly: NO, it just leaves the survivors to date, some of which will be the next to fail, whilst allowing a batch of new “great” ETF investments to lure the next whale, at their recent publicised success.