In an age of extremes there’s value in the average

26th January 2012

If you were asked to name three famous non-British swimmers from recent Olympic Games, who would you pick? Michael Phelps and Ian "The Thorpedo" Thorpe might spring quickly to the mind of the casual sports follower but then … who? If the next name to pop into your head was Eric the Eel, you have just chosen two of the greatest competitive swimmers of all time – and one of the worst.

How about the world's greatest ski-jumper? No? Any ski-jumper at all then? Did you go for Eddie "The Eagle" Edwards? So, not to take anything away from his bravery, you have just picked one of the very worst competitive ski-jumpers of all time. There are other examples in this vein but let's just say only one hit movie has been made about a bobsleigh team – and they were not very good either.

The value investing element to this – and, yes, there is one – is that the human brain is programmed to work and to prioritise and process information in a certain way. But how we learn, recognise and remember things is not necessarily all that helpful in enabling us make judgement calls.

We tend to remember extremes, which on the downside would mean the Erics and the Eddies for sports followers and the Worldcoms and the Enrons for investors. Closer to home, we have owned companies that have gone bust and that, a lot of people would suggest, is something of a disaster. Surely, they say, that means the portfolio has performed terribly?


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More from Mindful Money:

The ‘value’ of macroeconomic forecasting

What investors can learn from the bible

What can investors learn from innovative failures?

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