There are tens of thousands of professional money managers. Statistically, a handful of them have been successful by pure chance. Which ones? I don’t know, but I bet a few are famous.
The market doesn’t care how much you paid for a stock. Or your house. Or what you think is a “fair” price.
Professional investors have better information and faster computers than you do. You will never beat them short-term trading. Don’t even try.
The book Where Are the Customers’ Yachts? was written in 1940, and most still haven’t figured out that financial advisors don’t have their best interest at heart.
The low-cost index fund is one of the most useful financial inventions in history. Boring but beautiful.
More of the people reading this comment are likely to hire a financial advisor than try to become an investor.
With that in mind I’d like to hear more about why financial advisors don’t have our best interests at heart. I took a personal finance course in college that was 95% telling us how to create and execute financial plans and 5% telling us that in practice you should just hire a financial advisor. The former is to ensure that you know if your financial advisor knows what he’s talking about. Is this actually bad advice?
With that in mind I’d like to hear more about why financial advisors don’t have our best interests at heart.
In my experience, quite a few money managers generate a lot more fees then they strictly need to. Even some index funds will churn/rebalance more than necessary in order to generate a fee. When you consider the oft-cited statistic that very few managers outperform the market, and add in the fact that many they do eat the entire much of the surplus with fees, it becomes optimal to buy a good index rather than hire a financial adviser.
The problem with hiring advisers of all kinds is that you are hiring someone because they know more than you- which means you run the risk of them using their knowledge to rip you off.
Financial advisors aren’t exactly the same as money managers. They aren’t just there for advice on investing. They are there to help you create a financial plan, create financial goals, tell you how much you need to spend and save in order to meet those goals and if they are good, make sure you know when you are failing in those goals. At least in theory. Ergo, index funds aren’t exactly a replacement for financial advisors. I accept that if you just want to invest then index funds might be your best bet.
Moreover, even if I understand index funds and the basic of personal finance, it might still be a good idea to hire an advisor. I think that after many years of school, I understand the principles of how to learn a new subject effectively. Yet it is still far more productive for me to take a class than to try to self study a topic. This isn’t true for everyone (see Scott H Young) but its true for me. Having a structured environment keeps me on track. I suspect that managing my finances will be similar.
Probably good advice, although for middle class Americans you don’t really need a financial advisor if you understand index funds and the tax benefits of pensions.
I’d be interested in some guesstimations on how much luck it would take to be Warren Buffett, for example. Survivorship bias in finance is often employed as a just so story.
Can you think of any investor billionaires who seem to have become rich mostly by chance? I suppose they’d have to be people who were already rich and didn’t have to make many decisions to become even richer.
How would you distinguish an investor billionaire who became rich by chance from one who chose wisely, after the fact? If you have access to information regarding how they made their investment decisions, you should be able to tell them apart, but in most cases that information probably isn’t available.
One of Jon Ronson’s books (probably Lost At Sea, but I’ve since returned it to the library and no longer have it for reference,) features interviews with individuals at levels of income on steps of about five times apart, and one of those individuals, whose wealth was not in the billions, but was in the hundreds of millions, had made his wealth because a college friend introduced him to one of the founders of.… some major online corporation, possibly Amazon, so that he could provide startup money which he’d received from his father’s business. So his acquisition of his wealth was largely effortless and due to chance by his own admission.
I don’t know to what extent this is normal for very wealthy people, but his perception seemed to be that it was quite common.
How would you distinguish an investor billionaire who became rich by chance from one who chose wisely, after the fact?
Assess how many decisions they had to make to get there. Did they make a couple of large successful investments, or many smaller successful investments?
one of those individuals, whose wealth was not in the billions, but was in the hundreds of millions, had made his wealth because a college friend introduced him to one of the founders of.… some major online corporation
My point exactly. Fewer decisions to make by flipping a coin to become even richer, less chance of losing your money. There are fewer billionaires than millionaires who got there that way, because the initial money needed is harder to come by. I wonder if one could become a successful investor by studying people who made their fortune gradually.
Just because someone made their money through many small investments though, doesn’t mean that they didn’t make their money by luck. You’d have to be quite lucky, but then, there are quite a lot of people involved with the opportunity to get lucky.
Also, even a “smaller investment” in a business that grows explosively can be sufficient to produce considerable wealth. Suppose that of an investor’s investments, 49 out of 50 fail or stagnate, but the remaining one grows in value by 100,000%. Overall, the investor has multiplied their investment twenty times. It’s not necessary for an investor to usually pick right, just to occasionally pick very right. This is the principle that Paul Graham works by in funding startups.
Just because someone made their money through many small investments though, doesn’t mean that they didn’t make their money by luck.
Of course it doesn’t, are we speaking in certainties now?
Also, even a “smaller investment” in a business that grows explosively can be sufficient to produce considerable wealth.
That’s not “people who make their fortune gradually”. Don’t learn from people who hit for every 20 misses.
It’s not necessary for an investor to usually pick right, just to occasionally pick very right.
That depends on how much money they have in the first place and how often “occasionally” means. Also if this is a generally successful strategy, then obviously they are not just lucky.
Of course it doesn’t, are we speaking in certainties now?
Since what we’re examining is the set of investors who’re already rich, then the fact that a strategy has a low prior likelihood of working by chance doesn’t tell us that the investor probably didn’t achieve their success by chance, if there are enough people trying the strategy.
That depends on how much money they have in the first place and how often “occasionally” means. Also if this is a generally successful strategy, then obviously they are not just lucky.
It’s a successful strategy for those who are able to make large winners a significant fraction of their total investments, and this is something that could conceivably be achieved by intelligent selection or by luck.
low prior likelihood of working by chance doesn’t tell us that the investor probably didn’t achieve their success by chance, if there are enough people trying the strategy.
Would you say the same of successful neurosurgeons? Your argument is missing something.
I would say the comment isn’t relevant with respect to neurosurgeons, because there isn’t a large body of people attempting neurosurgery, most of whom are unsucessful.
One can become rich through investment through frequent failure and occasional large success, but to be successful in neurosurgery, your success must be consistent. Successful neurosurgeons stand out among regular neurosurgeons for extra-consistent success out of a field where consistent success is already the standard.
One can become rich through investment through frequent failure and occasional large success
Only provided you have a large initial pool of capital.
If you don’t, the first few failures will knock you out at which point you stop playing the game and the future potential large success never gets realized.
You can start with a small pool of capital and keep it up if you’re lucky with something among your first investments.
I can only speculate on how many people are in a position to experience this though, so I don’t know how likely that it is that anyone ends up rich by luck by that avenue.
This isnt hitting directly at the crux of this conflict, but I wanted to make this recommendation to you since you mentioned this strategy of 49 companies outta 50 failing… you oughtta check out this book called the black swan by Nassim Nicholas Taleb. It deals with small events having large impacts and how difficult it is to foresee some of these events. Also, he reasons that these events seem very predictable with hindsight.
I think it will add significant value to this discussion thread
Can you think of any investor billionaires who seem to have become rich mostly by chance?
What exactly do you mean by “by chance”? I am quite sure that the subset of people who invest by consulting a high-quality random generator is pretty small.
Luck in being exposed to trade at such a young age?
Luck in being born at the right place, right time?
Luck in having a specific set of genes that, say, gives him a high intelligence?
If you say “all of the above”, then being Warren Buffet is pure luck, and since there is only one Warren Buffet in 7 billion people, the maximum likelihood estimate for the probability of having enough luck to be Warren Buffet is about 1⁄7,000,000,000.
This answer probably doesn’t help at all, I’m just trying to point out some of the difficulties in guesstimation :)
I’d venture a guess luck/chance in this context means winning against the odds, making decisions that should have negative or zero/little expected utility given the available information and becoming rich in spite of that.
Highlights from “50 Unfortunate Truths About Investing” by Morgan Housel.
More of the people reading this comment are likely to hire a financial advisor than try to become an investor.
With that in mind I’d like to hear more about why financial advisors don’t have our best interests at heart. I took a personal finance course in college that was 95% telling us how to create and execute financial plans and 5% telling us that in practice you should just hire a financial advisor. The former is to ensure that you know if your financial advisor knows what he’s talking about. Is this actually bad advice?
In my experience, quite a few money managers generate a lot more fees then they strictly need to. Even some index funds will churn/rebalance more than necessary in order to generate a fee. When you consider the oft-cited statistic that very few managers outperform the market, and add in the fact that many they do eat the entire much of the surplus with fees, it becomes optimal to buy a good index rather than hire a financial adviser.
The problem with hiring advisers of all kinds is that you are hiring someone because they know more than you- which means you run the risk of them using their knowledge to rip you off.
Financial advisors aren’t exactly the same as money managers. They aren’t just there for advice on investing. They are there to help you create a financial plan, create financial goals, tell you how much you need to spend and save in order to meet those goals and if they are good, make sure you know when you are failing in those goals. At least in theory. Ergo, index funds aren’t exactly a replacement for financial advisors. I accept that if you just want to invest then index funds might be your best bet.
Moreover, even if I understand index funds and the basic of personal finance, it might still be a good idea to hire an advisor. I think that after many years of school, I understand the principles of how to learn a new subject effectively. Yet it is still far more productive for me to take a class than to try to self study a topic. This isn’t true for everyone (see Scott H Young) but its true for me. Having a structured environment keeps me on track. I suspect that managing my finances will be similar.
Probably good advice, although for middle class Americans you don’t really need a financial advisor if you understand index funds and the tax benefits of pensions.
I’d be interested in some guesstimations on how much luck it would take to be Warren Buffett, for example. Survivorship bias in finance is often employed as a just so story.
Less than you think given that he was able to cheaply borrow money through his insurance company.
Can you think of any investor billionaires who seem to have become rich mostly by chance? I suppose they’d have to be people who were already rich and didn’t have to make many decisions to become even richer.
How would you distinguish an investor billionaire who became rich by chance from one who chose wisely, after the fact? If you have access to information regarding how they made their investment decisions, you should be able to tell them apart, but in most cases that information probably isn’t available.
One of Jon Ronson’s books (probably Lost At Sea, but I’ve since returned it to the library and no longer have it for reference,) features interviews with individuals at levels of income on steps of about five times apart, and one of those individuals, whose wealth was not in the billions, but was in the hundreds of millions, had made his wealth because a college friend introduced him to one of the founders of.… some major online corporation, possibly Amazon, so that he could provide startup money which he’d received from his father’s business. So his acquisition of his wealth was largely effortless and due to chance by his own admission.
I don’t know to what extent this is normal for very wealthy people, but his perception seemed to be that it was quite common.
Assess how many decisions they had to make to get there. Did they make a couple of large successful investments, or many smaller successful investments?
My point exactly. Fewer decisions to make by flipping a coin to become even richer, less chance of losing your money. There are fewer billionaires than millionaires who got there that way, because the initial money needed is harder to come by. I wonder if one could become a successful investor by studying people who made their fortune gradually.
Just because someone made their money through many small investments though, doesn’t mean that they didn’t make their money by luck. You’d have to be quite lucky, but then, there are quite a lot of people involved with the opportunity to get lucky.
Also, even a “smaller investment” in a business that grows explosively can be sufficient to produce considerable wealth. Suppose that of an investor’s investments, 49 out of 50 fail or stagnate, but the remaining one grows in value by 100,000%. Overall, the investor has multiplied their investment twenty times. It’s not necessary for an investor to usually pick right, just to occasionally pick very right. This is the principle that Paul Graham works by in funding startups.
Of course it doesn’t, are we speaking in certainties now?
That’s not “people who make their fortune gradually”. Don’t learn from people who hit for every 20 misses.
That depends on how much money they have in the first place and how often “occasionally” means. Also if this is a generally successful strategy, then obviously they are not just lucky.
Since what we’re examining is the set of investors who’re already rich, then the fact that a strategy has a low prior likelihood of working by chance doesn’t tell us that the investor probably didn’t achieve their success by chance, if there are enough people trying the strategy.
It’s a successful strategy for those who are able to make large winners a significant fraction of their total investments, and this is something that could conceivably be achieved by intelligent selection or by luck.
You missed the part I edited.
Would you say the same of successful neurosurgeons? Your argument is missing something.
I would say the comment isn’t relevant with respect to neurosurgeons, because there isn’t a large body of people attempting neurosurgery, most of whom are unsucessful.
One can become rich through investment through frequent failure and occasional large success, but to be successful in neurosurgery, your success must be consistent. Successful neurosurgeons stand out among regular neurosurgeons for extra-consistent success out of a field where consistent success is already the standard.
Only provided you have a large initial pool of capital.
If you don’t, the first few failures will knock you out at which point you stop playing the game and the future potential large success never gets realized.
You can start with a small pool of capital and keep it up if you’re lucky with something among your first investments.
I can only speculate on how many people are in a position to experience this though, so I don’t know how likely that it is that anyone ends up rich by luck by that avenue.
Thanks. That’s a useful distinction.
This isnt hitting directly at the crux of this conflict, but I wanted to make this recommendation to you since you mentioned this strategy of 49 companies outta 50 failing… you oughtta check out this book called the black swan by Nassim Nicholas Taleb. It deals with small events having large impacts and how difficult it is to foresee some of these events. Also, he reasons that these events seem very predictable with hindsight. I think it will add significant value to this discussion thread
I’m not able to distinguish chance from skill for investors like George Soros.
What exactly do you mean by “by chance”? I am quite sure that the subset of people who invest by consulting a high-quality random generator is pretty small.
That we should probably ask from the quoted or the provider of the quote. If you can think of an interesting way to steelman it, please let me know.
The question is: luck in what, specifically?
Luck in every single trade?
Luck in that first trade that made him big money?
Luck in being exposed to trade at such a young age?
Luck in being born at the right place, right time?
Luck in having a specific set of genes that, say, gives him a high intelligence?
If you say “all of the above”, then being Warren Buffet is pure luck, and since there is only one Warren Buffet in 7 billion people, the maximum likelihood estimate for the probability of having enough luck to be Warren Buffet is about 1⁄7,000,000,000.
This answer probably doesn’t help at all, I’m just trying to point out some of the difficulties in guesstimation :)
I’d venture a guess luck/chance in this context means winning against the odds, making decisions that should have negative or zero/little expected utility given the available information and becoming rich in spite of that.
Is luck really this difficult a concept?
Yes?
This is virtually a verbatim quote something my father told me 30+ years ago.