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Found Stock Certs: Spot the Selection Bias

Posted By Barry Ritholtz On October 31, 2013 @ 7:20 am In Cognitive Foibles,Financial Press,Investing | Comments Disabled

This issue comes up every few years: Someone is rummaging about in their attic or basement (or less romantically, a safety deposit box), and they find some long forgotten stock certificates.

I first noticed this as an issue with EMC more than a decade ago. A Massachussetts area man found a few certs that had appreciated somewhat:

The man, a 62-year-old salesman who wants to keep his identity under wraps, recently found that some stock he thought he had sold long ago had been quietly gaining value for 13 years. A week ago, it was worth about $4 million. The investor said he bought 3,000 shares of EMC, the data storage company, on a tip from his cousin in 1987, but soon sold 2,000 of them to pay for his children’s college tuition. He forgot about the remaining 1,000 until the state’s Abandoned Property Division, noticing the inactivity, contacted him last month.

Sure enough, after spending three days in his cellar with a kerosene lamp, he found the still-sealed envelope with the stock certificates. The shares, for which he paid about $15.75 each, have split several times, making him the owner of 48,000 shares whose latest 52-week high was $104.94.

-New York Times [1], December 03, 2000

I was reminded of that story this week when this one showed up in the Guardian:

Man buys $27 of bitcoin, forgets about them, finds they’re now worth $886k [2]

Bought in 2009, currency’s rise in value saw small investment turn into enough to buy an apartment in a wealthy area of Oslo.The meteoric rise in bitcoin has meant that within the space of four years, one Norwegian man’s $27 investment turned into a forgotten $886,000 windfall.

Kristoffer Koch invested 150 kroner ($26.60) in 5,000 bitcoins in 2009, after discovering them during the course of writing a thesis on encryption. He promptly forgot about them until widespread media coverage of the anonymous, decentralised, peer-to-peer digital currency in April 2013 jogged his memory.

These sorts of stories typically are used to extol the virtues of Buy & Hold investing, or Set & Forget portfolios.

Why is this an example of Selection Bias?

I am reminded of the Steely Dan [3] song “Throw Back the Little Ones (and Pan-Fry the Big Ones)”. This method of collecting samples uses outliers — the Big Ones — the wildest and most improbable investing success stories to demonstrate their point. What you do not see are all of the Little Ones, the higher probability, more common versions of the found stock certificate. That narrative usually goes something like “Did you ever here of a company called First Amalgamated Something or Other?” These stories lack the sexiness and Wow! factor of improbably finding a few million dollars in your basement.

Here are the headlines that you did not see — because no one shares this information, and due to the natural selection bias of them:

• Man Finds Worthless Lehman Brothers Stock Certificates in Attic;  “I thought I sold these,” he cried

• Man Inherits 10 million shares of now worthless GM Stock; Great Grandfather dies after 10 year coma “If only he went sooner

• Forgotten AIG shares Almost Worthless; Post Bailout and Reverse Split, boy finds $11 dollars worth of stock; “it was once worth millions” dad laments

Or most likely:
• Forgotten Penny Stock Certificates Still Worthless

I bet for each one of the found millions story, there are 100 worthless unpublished stock cert tales.

Steely Dan song after the jump [4] . . .

 

 

 

 

 

Throw Back the Little Ones And Pan-Fry the Big Ones

Lost in the Barrio I walk like an Injun
So Carlo won’t suspect something’s wrong here
I dance in place
And paint my face
And act like I belong here

[Chorus]
Throw back the little ones
And pan-fry the big ones
Use tact, poise and reason
And gently squeeze them

Hot licks and rhetoric
Don’t count much for nothing
Be glad if you can use what you borrow
So I pawn my crown
For a ride uptown
And buy it back tomorrow

[Chorus]

Done like a matador I pray for the weekend
And hope the little girls still throw roses
Else I’ll change my bait
And move upstate
Before the season closes


Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2013/10/throw-back-the-little-ones/

URLs in this post:

[1] New York Times: http://www.nytimes.com/2000/12/03/business/investing-diary-buy-and-forget-pays-off-big.html

[2] Man buys $27 of bitcoin, forgets about them, finds they’re now worth $886k: http://www.theguardian.com/technology/2013/oct/29/bitcoin-forgotten-currency-norway-oslo-home

[3] Steely Dan: http://www.steelydan.com

[4] after the jump: http://www.ritholtz.com/blog/2013/10/throw-back-the-little-ones/#more-108854

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