Beat the Market I

Abstract

Back when scam artists sent snail-mail instead of e-mail, I received a letter that began “Dear friend,” a clear sign it was from someone trying to sell me something. Nonetheless, I read a bit more and saw this line highlighted in yellow: “IMAGINE turning $1,000 into $34,500 in less than one year!” Real friends don’t highlight their sentences, but I pushed on, thinking I might share this BS with my students. Sure enough, it was a con. The letter said that “no special background or education” was needed and that, “It’s an investment you can make with spare cash that you might ordinarily spend on lottery tickets or the race track.”Now I wasn’t sure that I wanted to share this letter, lest my students wonder where this company had gotten my name. I don’t buy lottery tickets or bet on horses. What had I done that made this company think I was a sucker? The letter claimed that, instead of wasting my money on lottery tickets and horse races, I could get rich buying low-priced stocks. For example, the price of LKA International had jumped from 2 cents a share to 69 cents a share in a few months, which would have turned $1,000 into $34,500. All I had to do was pay $39 for a special report that would give me access to “the carefully guarded territory of a few shrewd ‘inner circle’ investors.” The entire premise is ridiculous. If someone really knew how to turn $1,000 into $34,500, they would be doing it, instead of selling special reports for $39. Yet, we repeatedly fall for such scams because we are hard-wired to think that the world is governed by regular laws that we can discover and exploit. Stock prices cannot be random. There must be underlying patterns, like night and day, winter and summer. Our gullibility is aided and abetted by our greed—by the notion that it is easier to make money by buying and selling stocks than by being a butcher, baker, or candlestick maker. The inconvenient truth is that zigs and zags in stock prices are mostly random, yet transitory patterns can be found in random numbers. If we look for them, we will find them and be fooled by them.