Preface
Meet Charlie, just your typical office worker, who spent many years getting beaten down in his office football pool. Each week he'd put in his $10, and each week he'd lose. Charlie loved football and was always supremely confident in his picks; he just couldn't pick against the spread.
One day, Charlie was home looking over the coming week's games. His young daughter asked what he was doing. He explained. Then, thinking about his poor track record, he asked his daughter if she'd like to help. She was thrilled.
“Eagles at Cowboys—who do you like?” he said.
“Eagles,” she said.
“Why?” asked Charlie.
“Eagles are pretty,” said his daughter.
“Dolphins at Jets?”
She responded, “Dolphins, they're cute.”
And on it went.
By Sunday night, Charlie had 10 wins and 2 losses. He won again on Monday for his best week ever. Charlie won again that week, and the next. Whenever someone asked Charlie what his new secret was, Charlie would say, “I have a system.” If pressed, Charlie would even give detailed ex-post analysis to support his picks.
Then Charlie lost, and kept losing.
While Charlie claimed expertise and a system, really he just had a run of good luck. If anyone asked Charlie to explain why his real system worked, he couldn’t. This is obviously a parable for investing.
Like Charlie's daughter, investors will often try to justify their gut feel decisions with some explanation. Unfortunately, these explanations can be misleading or confusing. You can read Malcolm Gladwell's Blink ...
