We always look up to the successful people in our society. We try to learn and replicate what they do so that we can be successful as well. Is it all that simple?
There is one Warren Buffett, the world’s best investor of all time. The only investor that made to the Forbes richest man without founding or running a business. Take a trip to the bookstores or do a search on the internet and you will find overwhelming information about him and his investing principles. Investors who want to be successful should learn from the best in the world. Is it true?
I remember reading somewhere (should be The Snowball) about Warren Buffett giving a lecture on investing in his early days where he mentioned about having to choose one company out of thousands in the same industry. At that point in history, there could be many others who invested in the other stocks and had valid reasons for their choice as much as Warren Buffett. But most of them had lost money. We never know who lost but we remembered Warren Buffett’s stellar investment performance. Why are we so blindsided by the success example and forget that many have to fail in order for the few to succeed?
This survivor-ship bias is prevalent since we pay more attention to success than failure. Probably because humans seek pleasure and avoid pain, so we prefer to see more good examples than bad ones, and the media happily feed us with that. The truth is, there are always so many more failures in order to have a success. And our capitalist society works like this – it must encourage enough people to start businesses and hopefully under the law of large numbers, less than 10% will make it to become the largest corporations and the society will still progress because of them. Capitalists will say this competition is good because the surviving company beat the rest to provide the best product or service to the society.
This is what makes stock picking very hard. How do you find the next great company? Let’s say you are bullish about the IT industry and you believe ABC is going to dominate the future market (even the CEO does not have the same confidence as you). After buying ABC stock, you will end up with what psychologists termed as confirmation bias – you look for facts that support your decision and ignore the facts that do not. Regardless how confident you are, the odds of you picking the wrong stock remains high.
So it is a false sense to think that we have control. We give too much credit for our own successes. What we fail to recognise is the role of chance in our life. Starting from a sperm, we have to compete with so many sperm comrades to reach the ovary. Thereafter, it depends on the genetic makeup to determine if we end up as male, female, or anything in between. The unlucky ones may be born with deformities and we all will have varying IQ levels. Next, the environment we grow up in and the education our parents give us are different. The school that we go to, and the friends we sit next to, all had a part to play to alter our course of our life. Warren Buffett is unique and it just happened that his genetic makeup (he is very good with numbers), inclination (loves business and investing), and experience (learned from Benjamin Graham and partnered Charlie Munger) come together to make him a successful investor.
Can you be a successful investor? The hard truth is likely not. But that does not mean you do not try. Just like entrepreneurs, if everyone stops trying to start a business, we will soon run out of employers. On the other hand, if you try to take the risk to start a business, you have a very slim chance of succeeding. Likewise, investing is risky, many will lose money to the few.
