The Mysterious Letter - Nassim Nicholas Taleb

Here's a page from Nassim Taleb's book "Fooled By Randomness".

The Mysterious Letter

You get an anonymous letter on January 2 informing you that the market will go up during the month. It proves to be true, but you disregard it owing to the well-known January effect (stocks have gone up historically during January). Then you receive another one on February 2 telling you the market will go down. Again it proves to be true. Then you get another letter on March 1 - same story. By July you are intrigued by the prescience of the anonymous person and you are asked to invest in a special offshore fund. You pour all your savings into it. Two months later, your money is gone. You go spill your tears on your neighbour's shoulder and he tells you that he remembers that he received two such mysterious letters. But the mailings stopped at the second letter. He recalls that the first one was correct in its prediction, the other incorrect.

{I bought the Two-in-one - Fooled by Randomness and The Black Swan}

What happened? The trick is as follows. The con operator pulls 10,000 names out of a phone book. He mails a bullish letter to one half of the sample, and a bearish one to to the other half. The following month he selects the names of the persons to whom he mailed the letter whose prediction turned out to be right, that is, 5,000 names. The next month he does the same with the remaining 2,500 names, until the list narrows down to 500 people. Of these there will be 200 victims. An investment in a few thousand dollars' worth of postage stamps will turn into several million.

This is meant as a lesson not to be conned, NOT as a lesson on how to con!

It also meant to show that what happened to one sample (i.e all correct predictions from January to July) is only one possible outcome. If you had thought of that, you may not have fallen for the con.