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some do very well and some do very badly, but this is exactly what you would expect from a large number of market participants pursuing different rational strat
by mjn 13y ago
some do very well and some do very badly, but this is exactly what you would expect from a large number of market participants pursuing different rational strategies
This suggests a possible scam (probably not an original suggestion). Set up some large-enough number, maybe 30 or 40, shell investment companies. Each one trades according to a very specific but randomly generated strategy, which it publicly announces in advance. (Some care would have to be taken in generating the strategies, but they should be such that they're expected to match the market, when taken as an ensemble.)
After a few years, some of these strategies will have turned out to be successful, others haven't. Quietly wind down the unsuccessful ones. The successful ones now look prescient: this firm announced in, say, 2008, that the market conditions were such that strategy X is clearly correct going forward. And history has now borne them out: here, five years later, their prediction was right and their portfolio is up 1000%. Of course, there is missing information, that this was just one of 40 shell companies, and overall returns across all companies did not beat the market. But now this successful company can sell investment services/consulting/whatever on the basis of its individual track record.
I suspect actual investment consultants are effectively doing a distributed, non-coordinated version of this, even if not intentionally.
- bradleyjg 13y agoYou've just described the hedge fund industry. Well that and insider trading.
- ddeck 13y agoThis is the basis of well known - potentially hypothetical - scam. Send 2^n emails out, half stating that stock X will go up tomorrow, half stating the same stock will go down. The next day, split the addresses that received the correct prediction in half, and repeat.[1] [1] http://ask.metafilter.com/216295/Is-this-famous-investment-scam-real-or-fiction http://ask.metafilter.com/216295/Is-this-famous-investment-s...
- salvadors 13y agoDerren Brown used this approach to convince people he had a system for predicting the winners of horse races: http://www.youtube.com/watch?v=9R5OWh7luL4 http://www.youtube.com/watch?v=9R5OWh7luL4
- sbisker 13y agoThis happens all the time - a firm will make a number of "exploratory" funds, with the losers being rolled into existing funds and the winners "graduating" to being full funds and promoted aggressively by the firm. (At least according to A Random Walk Down Wall Street, a great book that is very relevant to this thread.)
- abcd_f 13y agoThere was a joke story based on the same idea. A recent grad looking for a job with an investment bank picked 64 banks and sent each of them a letter introducing himself. To a half of them he also added that next week Ford stock will be up and to other half he said it would be down. Next week, one half of the banks were off the list, because he was wrong. He split remaining banks in half again, sent another letter making his up/down prediction and repeated again for 4 more weeks. After 6 week there was just one bank on the list, but it was the one that saw him make an accurate prediction 6 times in a row. And so he sent them the job application.
- moocowduckquack 13y agoThat isn't so much a joke as an actual scam that people do. http://scams.wikispaces.com/Stockmarket+Tips http://scams.wikispaces.com/Stockmarket+Tips
- nerfhammer 13y agoIf the investment newsletter business is any indication, he shouldn't stop sending letters to those for whom his predictions were wrong.
- charleslmunger 13y agoThis exact result is described by Buffet: http://www.tilsonfunds.com/superinvestors.html http://www.tilsonfunds.com/superinvestors.html
- ronaldx 13y ago> The successful ones now look prescient: this firm announced in, say, 2008, that the market conditions were such that strategy X is clearly correct going forward. My bank advised me to invest in "Investment Fund #17": their headline info was that this fund marginally beat market average in each of the last 3 years. I decided to invest elsewhere.
- kybernetikos 13y agoDarren Brown did a stunt supposedly based on this idea. https://en.wikipedia.org/wiki/List_of_works_by_Derren_Brown#Derren_Brown:_The_System_.282008.29 https://en.wikipedia.org/wiki/List_of_works_by_Derren_Brown#...
- MarkMc 13y agoThis seems like a foolproof scam because it would be completely legal and guaranteed to work. To make it seem even more legitimate I would set the timeframe to 10 years. But here's what I don't get. It seems like such a reliable and lucrative scam that there should be dozens of managed funds who have grown by 1000% over the last 10 years. Where are they all?
- MarkMc 13y agoGood point. But how do you protect yourself from this scam? Do we always have to ignore the track record of every investment fund?
- spacehome 13y agoYes.
- kd5bjo 13y agoI've heard that mutual fund companies do this. After a few years, underperforming funds get closed and good performers diversify their holdings until they perform like index funds -- The few years of luck at the beginning are enough to show higher overall returns.