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

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

Posted May 8, 2011 8:12 UTC (Sun) by cmccabe (guest, #60281)
In reply to: josh's clients aren't stupid, they're smart by wahern
Parent article: Scale Fail (part 1)

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.

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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.