Investment success can really be down to the flip of a coin

If you are wondering whose investment advice to listen to, here is a small piece of advice about advisers: it pays to be deeply suspicious of investment 'gurus'.

To understand why, conduct a simple thought experiment. Imagine that 10 years ago 1,000 money managers set themselves up in business. On New Year's Day 1996 each manager tossed a coin to determine what he or she thought the Hang Seng Index would do over the next 12 months.

The ones that threw heads decided the market would rise, and invested their clients' money in long positions. Those that came up tails thought markets would fall, and went short.

At the end of the year, the half that was right would have made a pot of money. The other half would have got it desperately wrong.

Now, imagine that all the managers who lost money went out of business at the end of the first year, and that the remaining 500 again flipped coins to determine their investment positions for the following year, 1997. Once again, half would be on the right side of the market, and half would lose a packet and end up working in Wan Chai as barmaids or waiters.

At the end of the second year, our original 1,000 would have been whittled down to just 250. At the end of 1998, there would be 125, and so on.

Guess what. By the start of this year, there would have been just one survivor left (well, statistically speaking, 0.98, but let's not split hairs). Only one manager out of the original 1,000 would have called the markets correctly every single year for 10 years.