This article originally published in The Northern Daily Leader on 1 June 2013.
When I was a young boy, around the age of ten, I was given a magic set as a birthday present from my parents. Most of the ‘magical’ items were relatively straightforward – a marked deck of cards, a few metal hoops that could be joined together if you knew how and some uninteresting rope puzzles. What was in the box which really grabbed my attention however, was a mysterious looking magician’s wand. I knew the rest of the magic set was really just a bunch of cheap tricks, but the wand was different. It was heavy, solid, maybe even felt a little warm and was made of some strange unidentifiable substance (ok, maybe it was just cheap plastic made in China, but I was just ten years old, an age when your imagination was as wild as a Craig Thompson work trip).
I was sure the wand was capable of REAL magic, if I just believed hard enough. I tried a few experiments to see the power of the wand. I doused the dog in fairy dust (also called talcum powder) and hit him on the head with my wand while mumbling something Latin-sounding under my breath. Disappointingly all that happened was that he sneezed a few times and then bit me on the ankle in retaliation. Undeterred, I tried to use some magic on one of my sister’s dolls, hitting it on its back with my wand while chanting more pretend Latin (for some reason I felt the magic would only work with physical contact with the wand). Again the outcome was discouraging, largely because Lauren came into the room mid-trick and in her eyes saw me beating her doll with a short black stick. Tears, a tantrum and a six-month magic ban soon followed.
You may be surprised to hear that many investment fund managers are also keen on magic tricks, only theirs have more serious implications for your wealth. The technical term is ‘survivorship bias’, but it really is just like magic. How it works is that a fund manager might start a whole bunch of managed funds, and run them for a few years, usually with very little money invested in each fund. Each year the funds which perform badly are quietly wound up and removed from the marketing literature, until all that is left is the top performing fund. Hey presto! The fund manager can then point to his or her incredible track record of always beating the market, conveniently ignoring all of the dud funds which never made it that far. They may not use a wand, but when looking at managed fund returns it’s worth keeping an eye out for the magic in there!