Tails, you win.
Man, you fall out of a routine, and suddenly two months pass you by in the blink of an eye.
Fear not, I’m still kicking around. I’ve just been busy with other things, and, unsurprisingly, the blog is one of the first things to take the hit. But I’ll get into more detail about that in a different post. Today, I wanted to write about something specific.
The Psychology of Money
I’ve been reading The Psychology of Money by Morgan Housel.
If you haven’t heard of him, he’s a prolific financial writer. You can read most of his stuff at https://www.collaborativefund.com/blog/. If you want to get a taste of his work, some of my favourite recent articles of his are:
I enjoy his writing, wanted to support him, and, let’s be honest, was swayed by all the attention it has received across social media, so I grabbed a copy and gave it a read.
Overall, the book itself is pretty good. Admittedly, if you read this blog, then you probably read many other finance/investing/FI blogs and books, so you’re unlikely to read anything truly brand new in the book, but it’s presented in a very concise and readable manner.
However, there was one chapter in particular that stood out to me.
Tails, you win.
Chapter 6 talks about tail events.
One example that is given is that of Venture Capital. If you were to make 50 VC investments, you would expect half of them to completely fail, 10 of them to do alright, and maybe 1-2 to go crazy and make loads of money.
Another example is that of public stocks, and helps to explain why index investing is so popular.
Since the S&P 500 crashed earlier this year, it has shown a remarkable recovery, hitting a new all-time high at the beginning of September.
However, when you look at which companies are driving this recovery, it’s clear that tech stocks are flying high whilst most other companies are still lagging behind.
If you try to pick just a few stocks, there’s a good chance that you will miss out on these gains. On the other hand, if you buy an index fund, you can capture the aggregate gains of the market.
Funnily enough, one of the first examples of tail events in my own life that sprang to my mind whilst reading this chapter was Each-Way betting, practised by a number of UK FI bloggers.
I’m going to simplify, but the idea is that, when the odds are in your favour, you place an Each-Way bet on a horse to either win, or place in the top 3 (Saving Ninja, TheFIREStarter, and others have indepth guides if you want to learn more).
The odds are only marginally in your favour, so you have to place a lot of bets in order to ride the variance and, over time, make money.
From both my own experience and talking to others, the trend is similar to that described above. At least half of the bets you place will lose. Some will place, earning just enough to cover themselves. And finally, a few will win, winning enough to more than cover all the losses of the other bets.
This chapter made me think, because this concept crops up everywhere.
Amazon, Apple and Google are all companies that try many different things in order to catch lightning in a bottle and find that successful tail event. Most of their products/projects fail, but the few that succeed drive these companies to ever greater heights.
As well as business, it also applies to the individual in their day-to-day life and their career. The more you put yourself out there, the more likely you will “succeed” in your endeavours.
The first person that I thought of was Brandon Sanderson. He is now one of the most prolific fantasy authors today, but it wasn’t always that way!
Can you imagine working through that much rejection, and continuing to persevere?
The chances of any one publisher choosing to buy your book must be tiny. But the more you write and the more the publishers you contact, the greater that chance becomes.
(But it’s probably still tiny).
In general, the more you try a specific task, or the more you try a variety of things, the more likely you will find some measure of success.
It’s funny that this chapter of Housel’s book didn’t get me thinking about finance.
Instead, it got me thinking that you don’t really get anywhere in life without trying.
As a great philosopher once said:
“I get knocked down, but I get up again.”