Tuesday, January 4, 2011

Struck By Lightning!

Getting Lucky is Not the Same as Being Brilliant

In the tech sector, as in many others, some people hit it big with the right product at the right time.  Bill Gates was in the way when IBM dropped a lucrative licensing agreement on his head.   He was no "genius" of computing, but rather was in the right place at the right time when the money truck dumped a load on him.  He was also smart enough to jump on the Graphical User Interface bandwagon - by copying Apple and Xerox PARC to create Windows.

Since then, Microsoft has been last-to-market on nearly everything, from the Internet, to Video Games, to Online Music, to personal music players, to smart phones, to Social Networking - and yet, survives, not because they are geniuses, but because they still have a monopoly on operating systems and they haven't done anything so totally bad that they've bankrupted the company (yet).

But computer gurus?  Hardly.  And yet, many people hang on every word of Bill Gates, as though he had some special insight into the computer business, other than to be standing out in the rain when lightning hits.

Being in the right place at the right time (RPRT) when lightening strikes is not a matter of marketing insight, but luck.  And in the market, many people confuse luck with insight or skill.

Facebook was in the RPRT when it launched, and got a good buzz going.  And unlike Friendster (which was a fad that quickly faded) or Myspace (which totally fucked the pooch by going too commercial, too fast), Facebook has been lucky - so far - in not turning off legions of users, just yet.

People ask the founder of Facebook, Mark Zuker-whatever, what the next tech trend is, as though this 20-something has an insight into the computer world and, like Bill Gates, was not just incredibly lucky.

Similarly, many in the Stock Market who are "successful" are sought out like to Oracle of Delphi for their insights into business and economics, when the only insight they can offer is "when the lighting strikes, be right where it hits."

In any probabilistic system (like the stock market) there are going to be legions of losers, a large number of people who do OK, and one or two who appear to pick every stock, just right.  Unfortunately, these few winners tend to think they are Gnostic or something - that they have a special insight into the market - when in fact, they are just really lucky.

If you flip a coin 100 times, chances are, it will come out heads 50 times and tails 50 times.  But once in a while, it will go heads 90 times - and the person flipping the coin does not become an expert on coin flipping as a result.

In any probabilistic system, not only is it possible that someone will flip 100 heads or at least 90 heads, but actually inevitable.  If enough people are flipping coins, it will produce a bell-curve distribution, centering on the 50/50 norm.  It is like slot machines.  Putting a quarter in a slot machine and winning doesn't make you a "slot machine expert" - just a winner.  Soon to be a loser, tomorrow.

Are there market gurus?  Some, but not many.  Most of them make money the old fashioned way - taking marginal business and doing a lot of HARD WORK to turn them around (as Warren Buffet does).  But the myth that you can "stock pick" your way to success is wildly overstated - most stock pickers who "win" are merely statistical aberrations, not bloody geniuses.

And often that is their comeuppance.  They think, having never or rarely failed, that they are not just lucky, but instead are smart and have some special insight into the markets.  Such hubris often comes back to haunt them, in a very big way.

Now granted, there are some people who are both lucky and smart.  And sometimes, if you are lucky, and make some money, you can leverage this, if you are smart.  This is what Warren Buffet meant when he said "the first Billion is the hardest."   Once you have a lot of money, it is easier to make more - just as once you are debt-free and have real wealth, you will be offered the best deals no available to someone who probably needs them more.

So yes, if you are both lucky and smart, you will go far.  But a lot of people are just lucky, and then think they are smart, when they aren't - and end up losing what little they made through sheer luck.

During the last two decades, a lot of people in the market, such as hedge fund managers, thought they were geniuses, as they made money in a rising stock market.  Of course, someone buying an index fund made money in the rising market as well.  Heck, everyone made money in the rising market!

It is only today that they are realizing that perhaps they were (Motley) Fools.

Being in the Right Place at the Right Time does not make you a genius.  Never forget that!