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 
30 Comments »
RSS feed for comments on this post.
| TrackBack URI
You can also bookmark
this on del.icio.us or check the cosmos
we provide the cheapest CHI Flat Irons, CHI Hair Straightener, CHI hair products in the market and 100% Quality Guarantee. Free shipping to all over the wolrd.
Comment by jordan shoes — November 27, 2009 @ 7:28 pm
I always figured it was because Europe and Asia were so destroyed that it left us as the only producers of any note for the next 20-30 years while they rebuilt
Comment by UGG Boots — November 29, 2009 @ 6:20 am
Fammi sapere come leggere questo articolo, un sacco di cose che prima non sapevo
Comment by Nike Air Max 90 — December 2, 2009 @ 8:15 am
Fammi sapere come leggere questo articolo, un sacco di cose che prima non sapevo.
Comment by Nike Air Max 90 — December 2, 2009 @ 8:19 am
grazie mille~mi piace questo articolo!
Comment by Nike Air Max 90 — December 2, 2009 @ 8:33 am
There are several Gucci shoes that are considered to be elegant and classic designs.When it comes to footwear for wearingout on the town they have a great collection of suede sandals,satin mules,Gucci pumps and more.
Comment by gucci women shoes — December 3, 2009 @ 8:51 am
Compared to the crowd of losers, it is evident games of chance do produce astonishingly large winners.
Comment by Holiday Cottages UK — December 16, 2009 @ 1:50 am
A 50-50 chnce of winning or losing is a fair probability. One cant get better odds than that.
Comment by Health Beds — December 16, 2009 @ 1:53 am
Its that 50-50 chance that keeps men betting on these games of chance.
Comment by Waste Management Company UK — December 16, 2009 @ 8:35 am
Web Design…
Another web 3.0 topic worth discussing in detail….
Trackback by Web Design — December 17, 2009 @ 4:05 am
The distinguished scholars would learn your topic about this topic and buy the model dissertation from the dissertation writing service.
Comment by Joan26 — December 21, 2009 @ 3:42 am
Ultimately all games of chance must have a probability to success for folks to be interested in them.
Comment by Private Foundations — December 22, 2009 @ 8:07 am
Grazie mille! Questo articolo, me lo faccia sapere un sacco di cose che prima non ho capito!
Comment by Nike Air Max 90 — December 23, 2009 @ 12:13 am
Your good data should be published at the custom papers, because this is really simple to buy essay selecting the the best term paper writing service.
Comment by EmilynO21 — January 2, 2010 @ 6:03 am
grazie mille~mi piace questo articolo!me lo faccia sapere un sacco di cose che prima non ho capito!
Comment by nike air max 90 — January 3, 2010 @ 1:49 am
how to fix bad credit…
I can\’t believe I haven\’t been to this website before!…
Trackback by how to fix bad credit — January 7, 2010 @ 4:42 am
good
Comment by ed hardy — January 14, 2010 @ 4:24 am
The blog is really informative and i like to share it with my friends
Comment by nike pas cher — January 15, 2010 @ 12:05 am
Comment by ed hardy — January 21, 2010 @ 9:04 am
Comment by ed hardy — January 21, 2010 @ 9:05 am
Nike Scarpe Nike Scarpe
Nike Scarpe Nike Scarpe
Nike Scarpe Nike Scarpe
Nike Scarpe Nike Scarpe
Nike Scarpe Nike Scarpe
Comment by nike italy — January 25, 2010 @ 12:35 am
AJF 23
Comment by AJF 6 — January 26, 2010 @ 7:08 pm
M65 Field Jacket
Buy Kamagra
Comment by m65 field jacket — January 27, 2010 @ 6:32 pm
air jordan 6 rings
air jordan 23
Air Jordan 2009
Comment by air jordan 6 — January 27, 2010 @ 8:05 pm
Hi,
This is inspiring; I am very pleased by this post. Nice work, thanks for such information.
Comment by essay service — January 28, 2010 @ 12:51 am
I do know that students should know about this post or essay writing. At the essay writing services it’s not very hard to purchase already written essays and custom essays reffering to this topic.
Comment by Charlotte22 — January 31, 2010 @ 1:38 pm
So I start looking and looking.I reach I can use my imagination.When I expect character and minimal things
Comment by Ugg Slippers — February 1, 2010 @ 1:12 am
Nike Dunk Low CL
Comment by Nike Dunk High — February 5, 2010 @ 1:01 am
AJF 10
Comment by AJF 6 Rings — February 5, 2010 @ 1:05 am
Really good work about this website was done. Keep trying more - thanks!
Comment by Yahoouj — February 22, 2010 @ 10:49 pm