Points of Interest – Winter 2014 Eat like a chicken

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The Texas Sharpshooter

This article originally published in The Northern Daily Leader on 2 August 2014

A guy I used to work with, Dom, had a wonderful sense of humour. A couple of Irish tourists, Phil and Eamon, were in town visiting Phil’s brother. Dom wanted to show Phil and Eamon a slice of country life and invited them to come rabbit shooting one night on his property outside town. The day Phil and Eamon were due to come shooting, Dom found a dead brown snake in one of his paddocks. Although it was already dead, Dom put a bullet in its head and hung the body in a nearby tree. That night Phil and Eamon arrived for their rabbit hunt. After a few hours of driving around shooting rabbits, the boys were standing around the vehicle having a break, when Dom yelled out ‘Look! Snake!’ and gestured wildly into the darkness. Before Phil and Eamon could move a muscle, Dom raised his rifle to his hip and fired off a hasty shot into the dark. “I think I got it” he said, before leading Phil and Eamon toward a distant tree, where his torch light fell upon the dead brown snake with a neat bullet hole in its head. To say that Phil and Eamon were amazed would be an understatement. In their minds they had just witnessed one of the greatest shots of all time – a brown snake shot through the head, from 400 yards away, in the pitch dark and without even aiming! For weeks afterward Phil and Eamon would breathlessly recount Dom’s amazing shot to any who would listen, much to Dom’s immense enjoyment.

Without even knowing it, Dom had accurately recreated his own version of the Texas Sharpshooter Effect. This sleight of hand is where an aspiring marksmen would fire away blindly at the side of a barn and then paint targets around the bullet holes; inviting friends and family to come and view his or her amazing sharpshooting skills. A financial version of the Texas Sharpshooter Effect is a clever illusion of performance called backfill bias. Fund managers create a host of new managed funds, all employing different strategies and holding different investments. After a few years the underperforming funds are quietly closed, while those which have generated positive returns are loudly and widely publicised. The unsuspecting investor has no idea of the truth of the matter however, blindly accepting the past performance history at face value. The reality is that the outperforming funds which make it through the elimination process owe their survival more to luck than skill. If you fire enough bullets you’re likely to eventually hit one target, though this has little reflection on your skill with a firearm. So the next time you’re thinking of putting money into a managed fund, think of Dom and his dead snake and perhaps think again…