On July 30th, 1945, the cruiser USS Indianapolis, having just delivered the atomic bomb to US forces in the Pacific, is torpedoed by a Japanese submarine between Guam and the Philippines, and goes to the bottom of the ocean twelve minutes later. The event later forms one of the more chilling sequences in the movie Jaws, when Quint, captain of the Orca, relates to his new shipmates the horrors he experienced during the ship’s sinking:
“Over 1,000 men went into the water, 316 survivors came out, and the sharks got the rest.”
Terrifying? Yes. Historically accurate? Not so much. It is believed that a few hundred of the casualties died in the initial torpedo attack and that many more perished due to dehydration after five days floating at sea without fresh water. Hollywood rule #1: never let the facts get in the way of a good story.
Conversely, investing rule #1 is to always let the facts get in the way of a good story. But our brains are hardwired to work in one of two ways to reach a decision, quickly or correctly. Since we can’t do both, we develop shortcuts, one of them being to associate the most available or easily to recall information with truth or fact. Shark attacks are horrific and thus easy to recall. So, we vastly overestimate the probability of them, spawning things like Shark Week (beginning August 9th on Discovery Channel) and a host of moderately entertaining and cringingly awful shark movies. And yet, you are twice as likely to be injured by a falling coconut as a shark at your local beach. It is often the risk (or reward) you don’t foresee that ends up in front of your face, or on top of your head. Investors who find themselves adrift need to ignore the noise and dig deeper to avoid torpedoing their portfolios.
Don't wait for history to happen...