Tails, You Win


                                CHAPTER 6

                 Tails, You Win


You can be wrong half the time and still make a fortune.

“I’ve been banging away at this thing for 30 years. I think the simple math is, some projects work and some don’t. There’s no reason to belabor either one. Just get on to the next.”


—Brad Pitt accepting a Screen Actors Guild Award


Heinz Berggruen fled Nazi Germany in 1936. He settled in America, where he studied literature at U.C. Berkeley.

By most accounts he did not show particular promise in his youth. But by the 1990s Berggruen was, by any measure, one of the most successful art dealers of all time.

In 2000 Berggruen sold part of his massive collection of Picassos, Braques, Klees, and Matisses to the German government for more than 100 million euros. It was such a bargain that the Germans effectively considered it a donation. The private market value of the collection was well over a $1 billion.

That one person can collect huge quantities of masterpieces is astounding. Art is as subjective as it gets. How could anyone have foreseen, early in life, what were to become the most sought-after works of the century?

You could say “skill.”

You could say “luck.”

The investment firm Horizon Research has a third explanation. And it’s very relevant to investors.

“The great investors bought vast quantities of art,” the firm writes. “A subset of the collections turned out to be great investments, and they were held for a sufficiently long period of time to allow the portfolio return to converge upon the return of the best elements in the portfolio. That’s all that happens.”

The great art dealers operated like index funds. They bought everything they could. And they bought it in portfolios, not individual pieces they happened to like. Then they sat and waited for a few winners to emerge.

That’s all that happens.

Perhaps 99% of the works someone like Berggruen acquired in his life turned out to be of little value. But that doesn’t particularly matter if the other 1% turn out to be the work of someone like Picasso. Berggruen could be wrong most of the time and still end up stupendously right.

A lot of things in business and investing work this way. Long tails—the farthest ends of a distribution of outcomes—have tremendous influence in finance, where a small number of events can account for the majority of outcomes.

That can be hard to deal with, even if you understand the math. It is not intuitive that an investor can be wrong half the time and still make a fortune. It means we underestimate how normal it is for a lot of things to fail. Which causes us to overreact when they do.


Steamboat Willie put Walt Disney on the map as an animator. Business success was another story. Disney’s first studio went bankrupt. His films were monstrously expensive to produce, and financed at outrageous terms. By the mid-1930s Disney had produced more than 400 cartoons. Most of them were short, most of them were beloved by viewers, and most of them lost a fortune.

Snow White and the Seven Dwarfs changed everything.

The $8 million it earned in the first six months of 1938 was an order of magnitude higher than anything the company earned previously. It transformed Disney Studios. All company debts were paid off. Key employees got retention bonuses. The company purchased a new state-of-the-art studio in Burbank, where it remains today. An Oscar turned Walt from famous to full-blown celebrity. By 1938 he had produced several hundred hours of film. But in business terms, the 83 minutes of Snow White were all that mattered.

Anything that is huge, profitable, famous, or influential is the result of a tail event—an outlying one-in-thousands or millions event. And most of our attention goes to things that are huge, profitable, famous, or influential. When most of what we pay attention to is the result of a tail, it’s easy to underestimate how rare and powerful they are.

Some tail-driven industries are obvious. Take venture capital. If a VC makes 50 investments they likely expect half of them to fail, 10 to do pretty well, and one or two to be bonanzas that drive 100% of the fund’s returns. Investment firm Correlation Ventures once crunched the numbers. Out of more than 21,000 venture financings from 2004 to 2014:

65% lost money.

Two and a half percent of investments made 10x–20x.

One percent made more than a 20x return.

Half a percent—about 100 companies out of 21,000—earned 50x or more. That’s where the majority of the industry’s returns come from.

This, you might think, is what makes venture capital so risky. And everyone investing in VC knows it’s risky. Most startups fail and the world is only kind enough to allow a few mega successes.

If you want safer, predictable, and more stable returns, you invest in large public companies.

Or so you might think.

Remember, tails drive everything.

The distribution of success among large public stocks over time is not much different than it is in venture capital.

Most public companies are duds, a few do well, and a handful become extraordinary winners that account for the majority of the stock market’s returns.

J.P. Morgan Asset Management once published the distribution of returns for the Russell 3000 Index—a big, broad, collection of public companies—since 1980.

Forty percent of all Russell 3000 stock components lost at least 70% of their value and never recovered over this period.

Effectively all of the index’s overall returns came from 7% of component companies that outperformed by at least two standard deviations.

That’s the kind of thing you’d expect from venture capital. But it’s what happened inside a boring, diversified index.

This thumping of most public companies spares no industry. More than half of all public technology and telecom companies lose most of their value and never recover. Even among public utilities the failure rate is more than 1 in 10:



The interesting thing here is that you have to have achieved a certain level of success to become a public company and a member of the Russell 3000. These are established corporations, not fly-by-night startups. Even still, most have lifespans measured in years, not generations.

Take an example one of these companies: Carolco, a former member of the Russell 3000 Index.

It produced some of the biggest films of the 1980s and 1990s, including the first three Rambo films, Terminator 2, Basic Instinct, and Total Recall.

Carolco went public in 1987. It was a huge success, churning out hit after hit. It did half a billion dollars in revenue in 1991, commanding a market cap of $400 million—big money back then, especially for a film studio.

And then it failed.

The blockbusters stopped, a few big-budget projects flopped, and by the mid-1990s Carolco was history. It went bankrupt in 1996. Stock goes to zero, have a nice day. A catastrophic loss. And one that 4 in 10 public companies experience over time. Carolco’s story is not worth telling because it’s unique, but because it’s common.

Here’s the most important part of this story: The Russell 3000 has increased more than 73-fold since 1980. That is a spectacular return. That is success.

Forty percent of the companies in the index were effectively failures. But the 7% of components that performed extremely well were more than enough to offset the duds. Just like Heinz Berggruen, but with Microsoft and Walmart instead of Picasso and Matisse.

Not only do a few companies account for most of the market’s return, but within those companies are even more tail events.

In 2018, Amazon drove 6% of the S&P 500’s returns. And Amazon’s growth is almost entirely due to Prime and Amazon Web Services, which itself are tail events in a company that has experimented with hundreds of products, from the Fire Phone to travel agencies.

Apple was responsible for almost 7% of the index’s returns in 2018. And it is driven overwhelmingly by the iPhone, which in the world of tech products is as tail-y as tails get.

And who’s working at these companies? Google’s hiring acceptance rate is 0.2%. Facebook’s is 0.1%. Apple’s is about 2%. So the people working on these tail projects that drive tail returns have tail careers.

The idea that a few things account for most results is not just true for companies in your investment portfolio. It’s also an important part of your own behavior as an investor.

Napoleon’s definition of a military genius was, “The man who can do the average thing when all those around him are going crazy.”

It’s the same in investing.

Most financial advice is about today. What should you do right now, and what stocks look like good buys today?

But most of the time today is not that important. Over the course of your lifetime as an investor the decisions that you make today or tomorrow or next week will not matter nearly as much as what you do during the small number of days—likely 1% of the time or less—when everyone else around you is going crazy.

Consider what would happen if you saved $1 every month from 1900 to 2019.

You could invest that $1 into the U.S. stock market every month, rain or shine. It doesn’t matter if economists are screaming about a looming recession or new bear market. You just keep investing. Let’s call an investor who does this Sue.

But maybe investing during a recession is too scary. So perhaps you invest your $1 in the stock market when the economy is not in a recession, sell everything when it’s in a recession and save your monthly dollar in cash, and invest everything back into the stock market when the recession ends. We’ll call this investor Jim.

Or perhaps it takes a few months for a recession to scare you out, and then it takes a while to regain confidence before you get back in the market. You invest $1 in stocks when there’s no recession, sell six months after a recession begins, and invest back in six months after a recession ends. We’ll call you Tom.

How much money would these three investors end up with over time?

Sue ends up with $435,551.

Jim has $257,386.

Tom $234,476.

Sue wins by a mile.

There were 1,428 months between 1900 and 2019. Just over 300 of them were during a recession. So by keeping her cool during just the 22% of the time the economy was in or near a recession, Sue ends up with almost three-quarters more money than Jim or Tom.

To give a more recent example: How you behaved as an investor during a few months in late 2008 and early 2009 will likely have more impact on your lifetime returns than everything you did from 2000 to 2008.

There is the old pilot quip that their jobs are “hours and hours of boredom punctuated by moments of sheer terror.” It’s the same in investing. Your success as an investor will be determined by how you respond to punctuated moments of terror, not the years spent on cruise control.

A good definition of an investing genius is the man or woman who can do the average thing when all those around them are going crazy.

Tails drive everything.

When you accept that tails drive everything in business, investing, and finance you realize that it’s normal for lots of things to go wrong, break, fail, and fall.

If you’re a good stock picker you’ll be right maybe half the time.

If you’re a good business leader maybe half of your product and strategy ideas will work.

If you’re a good investor most years will be just OK, and plenty will be bad.

If you’re a good worker you’ll find the right company in the right field after several attempts and trials.

And that’s if you’re good.

Peter Lynch is one of the best investors of our time. “If you’re terrific in this business, you’re right six times out of 10,” he once said.

There are fields where you must be perfect every time. Flying a plane, for example. Then there are fields where you want to be at least pretty good nearly all the time. A restaurant chef, let’s say.

Investing, business, and finance are just not like these fields.

Something I’ve learned from both investors and entrepreneurs is that no one makes good decisions all the time. The most impressive people are packed full of horrendous ideas that are often acted upon.

Take Amazon. It’s not intuitive to think a failed product launch at a major company would be normal and fine. Intuitively, you’d think the CEO should apologize to shareholders. But CEO Jeff Bezos said shortly after the disastrous launch of the company’s Fire Phone:


If you think that’s a big failure, we’re working on much bigger failures right now. I am not kidding. Some of them are going to make the Fire Phone look like a tiny little blip.


It’s OK for Amazon to lose a lot of money on the Fire Phone because it will be offset by something like Amazon Web Services that earns tens of billions of dollars. Tails to the rescue.

Netflix CEO Reed Hastings once announced his company was canceling several big-budget productions. He responded:

Our hit ratio is way too high right now. I’m always pushing the content team. We have to take more risk. You have to try more crazy things, because we should have a higher cancel rate overall.

These are not delusions or failures of responsibility. They are a smart acknowledgement of how tails drive success. For every Amazon Prime or Orange is The New Black you know, with certainty, that you’ll have some duds.

Part of why this isn’t intuitive is because in most fields we only see the finished product, not the losses incurred that led to the tail-success product.

The Chris Rock I see on TV is hilarious, flawless. The Chris Rock that performs in dozens of small clubs each year is just OK. That is by design. No comedic genius is smart enough to preemptively know what jokes will land well. Every big comedian tests their material in small clubs before using it in big venues. Rock was once asked if he missed small clubs. He responded:


When I start a tour, it’s not like I start out in arenas. Before this last tour I performed in this place in New Brunswick called the Stress Factory. I did about 40 or 50 shows getting ready for the tour.


One newspaper profiled these small-club sessions. It described Rock thumbing through pages of notes and fumbling with material. “I’m going to have to cut some of these jokes,” he says mid-skit. The good jokes I see on Netflix are the tails that stuck out of a universe of hundreds of attempts.

A similar thing happens in investing. It’s easy to find Warren Buffett’s net worth, or his average annual returns. Or even his best, most notable investments. They’re right there in the open, and they’re what people talk about.

It’s much harder to piece together every investment he’s made over his career. No one talks about the dud picks, the ugly businesses, the poor acquisitions. But they’re a big part of Buffett’s story. They are the other side of tail-driven returns.

At the Berkshire Hathaway shareholder meeting in 2013 Warren Buffett said he’s owned 400 to 500 stocks during his life and made most of his money on 10 of them. Charlie Munger followed up: “If you remove just a few of Berkshire’s top investments, its long-term track record is pretty average.”

When we pay special attention to a role model’s successes we overlook that their gains came from a small percent of their actions. That makes our own failures, losses, and setbacks feel like we’re doing something wrong. But it’s possible we are wrong, or just sort of right, just as often as the masters are. They may have been more right when they were right, but they could have been wrong just as often as you.

“It’s not whether you’re right or wrong that’s important,” George Soros once said, “but how much money you make when you’re right and how much you lose when you’re wrong.” You can be wrong half the time and still make a fortune. 

There are 100 billion planets in our galaxy and only one, as far as we know, with intelligent life.

The fact that you are reading this book is the result of the longest tail you can imagine.

That’s something to be happy about. Next, let’s look at how money can make you even happier.



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