“If you had purchased $100 of Bitcoins in 2011 you would have more than $200,000 today.”
“If you had purchased $1,000 worth of Apple stock in 2003, they would be worth $1 million today.”
“If you had …”
I hear these kinds of claims all the time – in the media, at seminars, in books and on social media. The most disturbing fact is that there are some really smart people, who should know better, making them.
Now, you can’t argue against these claims. They are all 100% true. The problem with them is that they are misleading and are responsible for many ruined financial lives.
The goal of making this kind of claim is to convince people that you know what the next big thing is. So a part of the sales presentation where they ask you to invest in a new cryptocurrency (or any other opportunity) will go like this:
“If you had purchased $100 of Bitcoins in 2011, you would have more than $200,000 now. Our new Magic Returns cryptocurrency is next! A small investment of $1,000 could be worth $50,000 in a couple of years, and, if you invest $5,000, you could pay off your entire mortgage!”
Think about it. When somebody is making a claim like that, isn’t he or she using just a bit of cherry picking? Ask yourself: how many companies in distress (like Apple) were there in 2003, but didn’t make it big, or worse yet, failed in the end?
And how many other cryptocurrencies were there, apart from Bitcoin, that just disappeared?
The answer is hundreds or even thousands, and they all looked the same. So, the probability of choosing the right one was insignificant. Much less than 1%.
When people hear this kind of claim, they often fall prey to the logic error called “survivorship bias.” In the investing world, this is the tendency for failed companies to be excluded from performance studies due to the fact that they no longer exist. In other words, you focus only on survivors and you ignore all the failed companies. That is why survivorship bias can lead to overly optimistic beliefs.
When somebody is making claims like, “If you had purchased…,” he or she is intentionally misleading people into believing that they can pick the next big winner. In other words, it’s a dirty sales technique. Fortunately, you are now immune to this error, because you have read this article. Unfortunately, many people have fallen for it.
Investors who read and hear these kinds of claims all the time can get a feeling that it’s normal, and quite probable, to get very high returns on their investments. That is why they try to invest in all kinds of legal and illegal investment opportunities where the seller is claiming that very high returns are possible and even highly probable. And, in most cases, they lose their money.
One of the Six Dark Forces of Investing I talk about in my book, The Million Dollar Decision, is the lure of the shiny next big thing. People often fall prey to survivorship bias and start underestimating the risks involved with any opportunity that offers high potential awards. They try to catch the next big thing and they lose their money in the end.
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