josh's clients aren't stupid, they're smart [LWN.net]

josh's clients aren't stupid, they're smart

Posted May 8, 2011 1:37 UTC (Sun) by wahern (subscriber, #37304)
In reply to: josh's clients aren't stupid, they're smart by cmccabe
Parent article: Scale Fail (part 1)

> Warren Buffet has articulated his stock market strategy many times.
> Do your research; only invest in things that you understand;
> invest for the long term.

If you do those things in his books at best you'll approximate the market and not lose your shirt. And the model that best reproduces historical market behavior is a random walk. Overall market efficiency is an emergent effect from random processes, not the result of smart people being exceptional.

Look at the long line of successors Buffett has tried to groom. None could ever match his acumen by exercising his supposed methodology. Some have come close but inevitably make one or two wrong bets and their long-term gains fall far short of Buffett's. It's like gamblers who would have walked away with the bank but "bad luck" ruined their "streak". They disown the bad luck but claim the winning streak as the product of some personal attribute.

That's not to say that there aren't predictable ways to make money in the market, but they involve placing yourself in certain structural niches within the market. How you rise to those positions also seems to have little to do with intelligence or acumen by comparison with your peers. Where or how those structural market niches arise are unpredictable. Facebook didn't do anything different except chance upon the emergence of a niche at the right time.

The problem with defining success is that people look at the big winners and obvious failures and compare and contrast. If you see an impoverished alcoholic bum on the street and compare him to Buffett, you might conclude that success entails not letting alcohol control your life.

But once you have all of those DON'T DOs (i.e. how not to fail) you need to find the DO DOs. But even after you've enumerated all the DOs, you can find thousands or even millions of people who DO all the same things yet never succeed. There's a difference between not being a failure, and being successful, unless swimming instead of sinking is worthy of special praise. Success as flowing from individualized merit, therefore, is an illusion. In other words, just because you're successful doesn't mean you've done anything different than millions of other people. You're not special; you're just lucky by comparison. So there's little to be gained by analyzing and investigating what's "unique" about very successful people or companies. Anything you think is unique is either anomalous or not reproducible, and so liable to lead you astray from focusing on not failing. Focusing on not failing typically means making your product as good as necessary under the circumstances, not as good as possible.

You can certainly write a book about how to live a middle-class life, or how not to run a company into the ground. But no book will ever be able to describe how to become a millionaire, how to find the next great concept, or how to ensure that great idea will come to spectacular fruition by proper technical execution. Just as was stated earlier, many--perhaps most--of "successful" websites are ugly as hell behind the curtains. They were doing just enough to stay afloat, just like everybody else (on average), and serendipitously found themselves in charmed waters.

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josh's clients aren't stupid, they're smart

Posted May 8, 2011 8:12 UTC (Sun) by cmccabe (guest, #60281) [Link] (5 responses)

If the stock market were completely random, it would be completely useless. The whole reason for having a stock market is to allocate money to companies that will use that money in productive ways. We've already tried replacing markets with central planning committees-- it was called communism. It didn't work.

Obviously, markets have a lot of problems and inefficiencies. A lot of mutual fund managers are overpaid for the small amount of research that they do. Sometimes the market over-allocates resources to one sector, like housing. But just because the market has inefficiencies, or Warren Buffet is having trouble finding a successor, doesn't somehow indicate that the market is completely random.

Despite your professed love for quantifiable data, you haven't really presented that much hard evidence for me to argue against. What I would like to argue against is your fatalistic attidue. You seem to view yourself as a helpless pawn of all-powerful external forces.

Ironically, optimism-- or at any rate, the will to keep on going-- is one of the best predictors I know of success-- and not just in business. If you look at any open source leader, any entrepreneur, successful politician-- whatever-- you will find that one thing they have in common is that they believe in themselves and their abilities.

One book you might be interested in is "The Drunkard's Walk" by Leonard Mlodinow, a physicist at Caltech. In it, he puts forth some pretty convincing arguments that life is more random than we think. Mlodinow has a statistician's focus on hard data and it's pretty interesting. The performance of mutual fund managers, the outcome of the world series, and the decisions of Hollywood producers are all revealed as being more random than we might think. He also takes a swing a Bill Gates, claiming that he was just in the right place in the right time. Personally, I disagree-- I think Gates would have been at least moderately successful in any place and time. Anyway, you might enjoy the book.

josh's clients aren't stupid, they're smart

Posted May 8, 2011 22:37 UTC (Sun) by ibukanov (subscriber, #3942) [Link] (2 responses)

> Ironically, optimism-- or at any rate, the will to keep on going-- is one of the best predictors I know of success-- and not just in business.

This is not what I have observed. The most successful in business people I know personally are pessimists. In one particular case the pessimism made the guy to prepare for the worst. That allowed for him to survive bad times and gain from the good times disproportionally.

Another example is a very optimistic guy who quieted his job as an oil engineer and went to Thailand to start a shrimp farm. It was rather successful initially. But one day a drunken worker from the factory got into a conflict with local mobs and they burn the farm down... Now the guy is back into his engineering position.

josh's clients aren't stupid, they're smart

Posted May 9, 2011 16:08 UTC (Mon) by raven667 (subscriber, #5198) [Link] (1 responses)

Are you sure you aren't arguing against your point? In the examples you gave you have one person who is successful because they had the will to keep going and were prepared, which you call pessimism and one where the person was not successful when they quit after the first setback which you call optimistic.

Success is just like cancer, you can get (un)lucky but if you keep hitting those carcinogens you improve your chances of catching it, although not guaranteed either way.

josh's clients aren't stupid, they're smart

Posted May 9, 2011 21:19 UTC (Mon) by ibukanov (subscriber, #3942) [Link]

> successful because they had the will to keep going

In the first case it was not the will but rather the cash that the company saved during the good times under assumption that those would not last. With that it was not problematic to carry on during the bad times. And when competitors that hired too many engineers as consultants for the oil industry went burst it was trivial to pick up their clients. (In Norway it is rather hard to fire a person on a permanent position so a bankruptcy often is the simplest solution for a small company.)

> the person was not successful when they quit after the first setback

Only a very optimistic person would invest a few years of savings into something he had only vague idea about. And that fire on the shrimp farm was not a setback, it was a total disaster. As far as I know the farm was not insured against that type of damaged and the guy simply had no money to try one more time.

Note that I am not arguing that pessimism is required for a business success. I just want to say that even if optimism could be a necessary trait for some kinds of entrepreneurship, it may lead to failure just as well as to success.

josh's clients aren't stupid, they're smart

Posted May 14, 2011 14:31 UTC (Sat) by jjs (guest, #10315) [Link] (1 responses)

I highly recommend John Bogle's books, including "Enough" and "Don't Count on It". He's been a professional investor since the 1950's, founded Vanguard, and those books I've read include graphs & numbers illustrating his points. Main point - trying to outguess the market is a loser's game (at best over the long term you match the market, but when disintermediation is taken into account, you lose money). Over the long term, most money managers make lots of money on transaction fees, but their customers lose.

Another good book is "The Black Swan" by Nassim Nicholas Taleb.

josh's clients aren't stupid, they're smart

Posted May 14, 2011 14:40 UTC (Sat) by jjs (guest, #10315) [Link]

One other key point - the separation of the stock market into the economic and emotional sides - and overall economy grows with the economic part, bubbles and crashes are mainly caused by the emotional investment overinvesting/underinvesting as people chase this week's numbers, not the long term health.

josh's clients aren't stupid, they're smart

Posted May 12, 2011 9:30 UTC (Thu) by ekj (guest, #1524) [Link]

It depends on how you define "success".

If you mean, do a lot better than most people who peruse the same activity, then it's almost tautological that there's no recipee for it. If there was a simple and unambigious way of outperforming the general market as an investor, for example, then all investors would be using technique, thus negatings it's effectiveness. It's matemathically obvious that investors as a group, will not be able to beat the market. Thus one person can only beat the market to PRECISELY the same degree as another underperforms the market.

But there's other ways of defining success.

There's things that on the average *do* lead to goals that people desire. It's just that it's hard to do them. If you can manage to do them though, then achieving those goals become likely. I'd call that success.

Saving 10% of your income in a low-cost index-fund will, with high probability, give you a very solid financial position in a decade or two. (but not make you a billionaire)

You're just saying, it seems to me, there's no simple, predictable, repeatable way of doing the exceptional. That's almost tautological, because if there where, it'd no longer -be- exceptional.