This is an old tale made famous by Derren Brown on TV in 2008. Nobody is quite sure why Baltimore and it may or may not have involved a stockbroker, other stories are about betting on football matches, but the message of the story is still good, nonetheless.

Are you sitting comfortably? Then I’ll begin…

Suppose you received a letter (or more likely nowadays a text message or email) from a stockbroker who told you a certain stock was going up over the next several weeks. You watched the stock, and sure enough it went up. A few weeks later that same stockbroker sent another letter to say another stock was going to go down over the following few weeks. Sure enough, as you watched, the stock did go down.

Then that same stockbroker sent a third letter to tell you to watch another stock that was going to go up. Sure enough it did. With the next letter the stockbroker told you to watch another stock that was going to go up. And sure enough it did. That same stockbroker sent another six letters each time predicting correctly the direction of every stock he told you to watch – a perfect prediction ten out of ten times. In the eleventh letter he asked for a big investment. What would you say? He had been right ten out of ten times.

What the investor does not see is the total picture. What was happening from the stockbroker’s point of view?

The stockbroker initially sent 10,240 letters. In 5,120 he predicted the stock would go up; in the other 5,120 he predicted the stock would go down.

The 5,120 to whom he sent the letter saying the stock would go down never heard from our stockbroker again. Of the 5,120 to whom he said the stock would go up, 2,560 got a second letter predicting that second stock would go up and the other 2,560 got a second letter saying the second stock would go down. You get the picture now.

Only 10 prospects would get letters with 10 perfect predictions. The other 10,230 people never heard from the stockbroker ever again.

This is a great illustration to what happens in the investing world.

The big financial companies make money out of you investing in their funds. They make even more if you change your mind, sell some investments and buy other ones.

The marketing they produce and the stories that the financial media tell alongside them are like the Baltimore stockbroker. What is their real agenda? What is happening from their point of view? The financial companies simply want to make more money. The media simply want to sell more advertising. To do so they tell really good stories about what you should do and why (equity income, value stocks, European equities, China… etc).

I’m very cynical about the big financial companies and the financial media. Our investment approach at Chatfield is neatly summarised as “eat your greens and take the stairs”. It’s not very exciting but that is exactly what you need in a lot of aspects of life. Be wary of exciting investments and exciting diets. They are likely to have hidden agendas!