Games of Chance Produce Large Winners Internet Marketing for Internet Retail : The Preston Blog

Games of Chance Produce Large Winners

When I was a freshmen in college I remember hearing that Peter Lynch was speaking at a nearby university - even as a poor college student I ponied up the $25 entrance fee to hear this investing guru speak.For those who don’t know, Peter Lynch was the manager of the popular Fidelity Magellan Fund. He took over the fund when it held around $20m in assets and by the end of his 13-year stint the fund was valued at $14b - it averaged an annual return of 29.2% during his tenure.I thought the most interesting thing about Peter Lynch, however, was the fact that he quit while he was at the top of the game to spend more time with his family. That’s not the point of my story, though - just an interesting side note.Maybe Peter Lynch just got luckyA few days after hearing Lynch speak I was chatting with my accounting teacher, Ralph, a brilliant man who also happens to be a money manager (I am still in contact with him to this day). He said something very thought-provoking about Lynch - he said, “you know, some people think he’s just lucky.” I didn’t understand - how could you beat the S&P all but 2 years of a 13-year career by luck? He went on to tell me that a lot of people thought Warren Buffet was just lucky too. Now this just sounded like a crazy conspiracy theory…Games of chance produce large winnersI was surprised, though, when I started listening to Ralph that the theory actually made sense - games of chance produce large winners.Take, for instance, a lottery - it is a game of chance that creates a lot of losers and a few very large winners. Assume for a second that investing has nothing to do with skill, that it is purely a game of chance where an investor has a 50-50 chance of winning or losing. (Hey, after what we’ve been through over the past 2 years 50-50 odds seem pretty good, don’t they?)Over time most investors would break-even - they would win as many bets as they lose. There would be a lucky few, however, who seem to always be right. Since this is a game of chance, of course, there is nothing special about them - they are just bell-curve-outlying-freaks. (At the same time, there would be the very unlucky few who seem to always be wrong - assuming a large sample size there should be just as many “losers” as “winners”).Market influenceBut that’s not all - when a statistical outlier has demonstrated an unusual pattern of winner-picking they start to attract attention from their peers. Their peers assume that the outlier has some sort of magical winner-picking powers. At this point the outlier can actually create their own market adjustments - if they are betting on a stock, for instance, the stock is likely to increase solely based on the fact that they are willing to make a bet on it (regardless of the fundamentals of the underlying stock).Savvy outliers learn to quickly capitalize on their newfound fame - some are able to parlay even the shortest stints of success to major, market-moving influence. Celebrities are really good at this.The FormulaSo what we are left with is a basic formula for becoming an influencer (assuming that whatever business you are in is merely a game of chance, see disclosure below):

Learn to publicize your successes. You will have plenty of time for self-deprecating banter after you are an influencer - when you have achieved influencer status you really can’t do anything wrong. At this point people think you know something that they don’t (even when you don’t).
When you hit a string of lucky breaks you should learn to capitalize on them quickly - the faster you do this the sooner you will be able to create your own market adjustments.

Disclosure: I don’t really believe that all business is a game of chance, but I do think it’s an important factor. I think that really, really smart business owners can increase their chance of success significantly. If, for instance, an entrepreneur can increase their odds of success to 60%, statistically they will probably become an influencer in their industry organically (without needing to be a statistical outlier). In this case their influence in the community would be well deserved since they really do have magical winner-picking abilities.By the way, I know now that Ralph doesn’t personally subscribe to this theory (he is after all an investor in Berkshire Hathaway).Also, I think Warren Buffet and Peter Lynch increased their odds of success by paying attention to basic business fundamentals and sound investment practices - they probably had better than 50-50 odds on each stock-picking decision they made. However, I think there are a lot of other investors who make rational, disciplined investment decisions like Peter Lynch and Warren Buffet - I just don’t know their names because they weren’t quite as far out there on the bell-curve

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Games of Chance Produce Large Winners

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