For those unfortunate enough not to see the film, Fletcher is a music teacher who is a monstrous tyrannical bully, of the sort familiar to anyone who went to a grammar school in the 1970s.
When asked to justify his methods, Fletcher tells the story of how Jo Jones threw a cymbal at the teenage Charlie Parker’s head (in fact, it was at his feet). Mortified by this, Parker practiced feverishly in the following months and became a genius. Fletcher says: “I was there to push people beyond what's expected of them. I believe that is... an absolute necessity. Otherwise, we're depriving the world of the next Louis Armstrong. The next Charlie Parker.”
His pursuit of genius, however, comes at a high price: his methods drive some students away from what would otherwise be decent careers, and one even to suicide.
It’s here that there’s a direct parallel with investment. The search for a massive pay-off can prevent us achieving respectable ones. As the University of Miami’s Alok Kumar and Yale University’s Nick Barberis have shown, shares with a small chance of a massive return underperform the market. This is because some investors have lottery-type preferences. Although a ten per cent chance of a ten per cent gain and a one per cent chance of a 100 per cent gain have the same expected value, some people prefer the latter. Their demand means that such stocks are over-priced and so subsequently under-perform.
This has for years been a big problem with Aim stocks. Since its inception in 1995, the Aim index has fallen by 29 per cent during which time the All-share index has more than doubled – and it has paid fatter dividends too. It has also been one reason why newly-floated stocks have, on average, under-performed.
In both cases, investors have looked to Aim and to new companies to give us the next great company. In doing so, they’ve made the same error as Fletcher. Just as Fletcher’s hunt for genius prevented him producing students with respectable decent careers, so investors' search for ten-baggers has stopped them achieving respectable returns by diverting money from duller but decent stocks.
It’s not just Fletcher and investors who make this mistake. One longstanding curiosity in gambling – on horses and other sports – is the favourite-longshot bias: people bet too much on long odds and too little on favourites. And, I fear that some young people are attracted too much to “winner take all” careers in which there’s a tiny chance of a massive salary but a big chance of failure; these include acting, sport and, increasingly, journalism.
Chasing the very best to the neglect of the good is, therefore, a widespread mistake. I suspect it has its root in another error. Fletcher failed to see that musical genius is incredibly rare. Likewise, investors in Aim or new stocks have failed to see that fantastic growth is also rare. There’s a name for this mistake. It’s base rate neglect.
This can have catastrophic consequences. I suspect it was one reason for RBS’s disastrous takeover of ABN Amro; the bank’s board failed to give proper weight to the fact that very many mergers fail. But we also see the mistake in low places too. For example, those pundits who are hailing Harry Kane as the new Alan Shearer might be under-rating the rarity of truly great players and failing to recall just how many promising youngsters go on to disappoint us.
You might think it odd for me to speak of investors and fictional music teachers, or of bank collapses and football, in the same context. This, though, is precisely my point. Investing is not a separate activity which requires arcane knowledge possessed only by pompous middle-aged men in suits. Instead, it requires an awareness of the many possible errors of judgment we can make. And these errors are to be found everywhere - in the cinema, in football and in boardrooms. We can therefore become better investors by learning from everything around us.
