Why do people think investing is easy?
For a variety of reasons investors sometimes draw incorrect conclusions regarding investment strategies. In many cases it is difficult, or impossible to know if an apparently successful method was, in fact the cause of the successful, or unsuccessful outcome. Appearances can be deceiving. Consider the hypothetical case of the fraudulent investment newsletter writer. It goes like this…
Investment Newsletter Scam.
The writer of an investment newsletter sends out ten thousand free newsletters to potential future customers. In five thousand of them he predicts that the market will move up, and in five thousand he predicts that the market will move down. One prediction is, of course, correct and one is not, so, from the standpoint of half of the people his record of predicting market movements is 100% correct.
To the people who received the correct prediction he sends another prediction. To half of the group he predicts that the market will move up, and to half he predicts that the market will move down. One prediction is, of course, correct and one is not, so from the standpoint of half of this group (twenty-five percent of the original ten thousand) his record of predicting has been correct twice. Two thousand, five hundred people are beginning to believe that this guy can predict market movements.
After another round of predictions there will be more than a thousand people who have observed correct predictions three times in a row. They are becoming believers. Some of these will purchase the newsletter, now. You get the idea.
So, how can investors avoid scams, and increase their chances for success?
Investors can improve their odds by doing the following:
- Research and understand an investment method and the historic results.
- Determine whether that method is likely to (continue to) be successful.
Investment success is difficult, even without fraud.
The second task (determining whether an investment method is likely to continue to be successful) is problematic for all investors, including professionals. It is one reason why many investors do not achieve their investment goals. What worked during one period of time may not work during the next. Having a broad, deep understanding, and an objective long-term perspective of investment markets and investor behaviors can be the difference between success and failure.
In our experience, most investors do not have a proper perspective. They tend to draw incorrect conclusions regarding investment strategies because they don’t fully understand where things fit and why things behave as they do. A good relationship with an insightful adviser who has studied capital markets, and “been around the block” a few times is imperative.