I once heard this great story from a comedian who said his career started falling apart when he realized that he was spending so much time managing and producing his act, that he had less time doing what made his act great to begin with, which was analyzing everyday life and making jokes about it.
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Cards issued by Sutton Bank, Member FDIC, terms and conditions And I came across something that I had forgot about, which was that the title of my first book, The Psychology of Money, was originally going to be, You can be wrong half the time and still make a fortune.
It's funny to say that now because that is a terrible title.
Nobody would have bought that book.
I originally ran with that title because it highlights what I think is one of the most important rules, theories, and investing, which is how much tales drive everything.
And that most of your success in life, not just investing, but for lots of various in your life, most of your success, most of what's important, will come from a very small percentage of the things that you do.
Let me tell you a little story to show you what I mean.
Steamboat Willie put Walt Disney on the map as a cartoonist.
Business success on the other, was a completely different story.
Walt Disney's first studio went bankrupt.
His later cartoons took so much money to produce that he just couldn't keep it going.
And so by the mid 1930s, Walt Disney had produced more than 400 cartoons.
Most of them were very short, most of them were beloved by viewers, and virtually all of them were losing money.
So he got to this point in the mid 1930s where his second studio was nearly broke again.
Then something big happened.
Snow White and the Seven Dwarfs changed everything.
The $8 million in receipts that it earned in the first six months of 1938 was literally an order of magnitude higher than anything else Disney had ever earned from his work.
And that completely transformed Disney Studios.
All of the debts that he was in at the time were repaid.
All of his key employees that were threatening to quit, they all got big retention bonuses.
was the company purchased a huge state of the art studio in Burbank, where it's still remains today.
And then Walt Disney won an Oscar, which made him a full blown celebrity.
So by 1938, he had produced several hundred hours of films throughout his career, but in business terms, in economic terms, the 83 minutes of Snow White was pretty much all that mattered.
Out of the hundreds of hours that he had done, pretty much one hour is the only thing matter it in is business.
And that's just the point that I'm trying to drive home here.
Long tails drive everything, the extreme ends of the spectrum, the tiny percentage of things that you do end up driving the majority of your results.
That is true in business.
It's true in investing.
It's true in sports, in politics, with products, with careers, everything.
Like one rule of thumb that I think about is anything that is huge or profitable or famous or influential is a result of a tale event.
One other rule of thumb here is that most of our attention goes to things that are huge and profitable and famous and influential.
And when most of what you pay attention to is the result of a very extreme tale, you underestimate how rare and how powerful they really are.
There are some areas of investing where people understand this intuitively.
Venture capital, for example, is known as a tail -driven industry.
You've probably heard that before.
If a venture capitalist makes 100 investments, virtually all of their return will come from one or two of them.
And they're going to lose all of their money on maybe 80 of them.
That's kind of how the distribution works, right?
There's this firm called Correlation Ventures, and many years ago they crunched the numbers.
out of more than 21 ,000 companies that raised money from a venture capitalist, 65 % of those investments lost money.
Two and a half percent of those investments went up between 10 and 20 fold, and 1 % of them made more than 20 fold return.
And half a percent, which is literally about 100 companies from that original 21 ,000, earned 50 fold or more.
And that is where the vast majority of the industry's profits come from.
From a half of 1 % of the investments that it makes.
And so there's this view that venture capital is like the super risky crazy Wild West kinda betting investing because so few of the investments actually make money over time.
But I'll show you that no matter how you are investing your money, even if you're investing your money in public stocks in the stock markets, in the S &P 500 that are in everybody's 401K, it is not that much different.
The purpose of owning hundreds of public companies, like the S &P 500 Index, is to diversify and reap the gains of a broad group.
But you might be surprised how much of that broad index if you're owning 500 companies are driven by just a few companies.
We've seen that in recent years when just a handful of companies, Nvidia, Apple, Amazon, Microsoft, Tesla, just a couple of companies, are responsible for sometimes a third or more of all of the return.
And this topic has become a big deal in the last couple years, I think as people started paying attention to it.
People are always looking for a reason to be pessimistic and to say that stock market games are not sustainable.
And they've pointed to the fact that just a few of the so -called magnificent seven tech stocks are driving all the return.
And that being an unsustainable path going forward.
And look, I'm not going to say whether that's right or wrong, but I will say this.
It has always been like this that the stock market is driven by tales just a couple of companies doing all the heavy lifting.
JPMorgan Asset Management once published a distribution of stock market returns from 1980 to 2014.
So this 34 year period when the stock market did very well, and during that period, 40 % percent of all public companies lost at least 70 % of their value and never recovered.
40%, 40 % lost all of their value during this period.
Effectively, all of the stock market's return came from seven percent of companies that had incredibly high returns.
You know what they are, Microsoft, Amazon, Home Depot, Walmart, those kind of companies.
That is the kind of thing that you would associate with venture capital, but it is what happened in your grandmother's index fund.
The most boring, basic, bland ways to invest, that's what it is.
And look, if you're investing in one index fund, you don't know that because you're investing in one fund that is tracking 500 companies, but if you open the lid on that fund and see what's going on underneath the hood, it's a completely different game.
It's even true if you drill down to those rare winning companies.
So think about a company like Google that is responsible for a huge portion of the stock market's return.
I looked it up. their hiring acceptance rate is 0 .2 percent.
At Facebook, it's 0 .1 percent of the people who apply to those companies actually end up working there.
So the people who are working at these tail companies are tail workers themselves.
It's a tiny, tiny sliver of people who graduated from the best schools that are actually going there.
So most of the returns are coming from a small number of companies that are being managed by a very small number of people.
Warren Buffett once said that he has owned between 400 and 500 stocks during his lifetime.
And yet he has made most of his money on 10 of them.
His late partner Charley Munger followed up and he said, quote, if you remove just a few of Berkshire's top investments, its long -term track record is pretty average.
Benjamin Graham, who was Warren Buffett's early mentor back in the 1950s had an even more startling example of this.
The postscript of Benjamin Graham's famous book, The Intelligent Investor discusses a quote, partnership investment in one stock, which was Geico, the insurance company.
Graham writes, quote, the aggregate of profits accruing from the single investing decision far exceeded the sum of all others realized through 20 years of wide -ranging operations in the partner specialized fields involving much investigation, endless pondering, and countless individual decisions.
And that partnership that seemingly recklessly made all of its money on one stock was Graham's own.
When you accept that tails drive everything in business and investing in finance, you it is normal for lots of things to go wrong, and to break, and to fail, and to fall.
So if you're a good stock picker, you might be right half the time.
If you're a good business leader, maybe half of your products and strategy ideas will work.
Something I've learned from both investors and entrepreneurs is that nobody makes good decisions all the time.
The most impressive people you'll ever meet are packed full of horrendous ideas that just did not work out for them.
Several years ago Jeff Bezos was talking about the Kindle Fire Phone, which you probably won't remember was a phone that Amazon launched to compete with the iPhone.
Of course it was a horrendous flop.
Nobody used it. The people who did use it said it was terrible.
And Jeff Bezos went on TV and they were talking to him about it.
Like they wanted him to be contrite for this failure of the Fire Phone.
And Jeff Bezos said, quote, "'If you think that's a big failure, We are working on much bigger failures right now.
I am not kidding. Some of them are gonna make the fire phone look like a tiny little blip.
And so that is why a company like Amazon does so well.
It's willing to try a million different things knowing full well that most of them will not work, but one or two of them will be bananas.
Several years ago I saw this tweet from a guy named Benedict Evans and he said, quote, Silicon Valley is a system for running experiments.
It is the nature of experiments that some fail.
The key is for the rest of the ones at work to really really work.
And he is right. But that is not just true for Silicon Valley.
It is true almost everywhere you look.
One of my favorite examples of this happening is in comedy.
The Chris Rock that I see on TV, the comedian, is That's hilarious.
He is flawless. Every joke is amazing.
The Chris Rock who performs in dozens of small, tiny comedy clubs every year is merely okay.
And that is by design.
No comedian is so smart to preemptively know which jokes are going to work.
And so every big comedian who is out there tests all of their material in small comedy clubs before they use it for the Netflix special.
Chris Rock was once asked if he missed performing in small clubs, and he responded, When I start a tour, it's not like I start out in arenas.
Before this last tour, I performed in a new place in New Brunswick called The Stress Factory.
I did about 40 or 50 shows getting ready for the tour.
And there's this newspaper article talking about Chris Rock performing in this tiny club, and everyone who is in there is like, oh my gosh, we're here to see Chris Rock.
This is so amazing.
and then they are stunned when he starts performing.
Because his jokes suck.
None of it is any good because Chris Rock is testing new material and if he's lucky one out of every 10 of those jokes that he does will be funny.
And that is what makes it into the Netflix special.
So what I see on Netflix is the result of a tale.
Those are the very few jokes that just hit people perfectly.
And And you only get there, if you're willing to go through the trial and error of sitting on stage in a small club, testing out jokes, most of which suck.
And this idea of tales driving everything has always been true, but I think it's more true today than it's ever been.
Because we live in a world where so much information and attention has been democratized in a way that it's much more winner take all than it used to be.
And in that world, where it's more winner take all, you're gonna have the situation where the majority of the success comes from a very small number of the things that are taking place.
I was watching this documentary last week on Tom Green.
If you're of a certain generation, of course you know who Tom Green is.
If you're not, he was a ridiculous comic back in the early 2000s.
And the documentary was talking about his early rise on TV.
and back in the late 1990s it was so difficult to do something on TV.
You had to go purchase this incredibly expensive camera system and then you had to beg and borrow and cheat and steal to get the local public TV station to actually give you a show which was ridiculously hard of course, and in the documentary Tom Greene holds up an iPhone and he's like, the kids have no idea how lucky they are today because all you need today is this iPhone to film you and then load it onto YouTube.
That's all you need to do today.
And in that world where millions of people can have YouTube channels and are uploading content every day, of course, the vast majority of those channels and that content is not going to work out.
And in that world where it's more democratized, of course, it's going to be win or take all.
That when something works, it really works.
But for the vast majority of people who are trying to make it work, it's not going to work.
This is true in my field, books, as well.
It's always the case that in any given year there might be thousands of books that are published, yet the majority of industry returns might come from 50 of them.
One takeaway from that is that no matter what you're doing, you should be comfortable with a lot of things not working.
You should be comfortable with a lot of things failing.
That is normal. That it's true for companies which need to learn how to fail well and respond to some their new products not working.
That's true for investors who need to understand that tales drive everything in the power of diversification and the importance of time horizon.
And it's important to realize that the jobs that you have and even the entire careers that you are in might take a few attempts before you find a winning groove.
That's how these things work.
Big success is very rare.
And to end this, I will remind you that there are a hundred billion planets in our galaxy.
Just the fact that you are listening to this podcast is the result of the longest and craziest tale that you can imagine.
That's it for this week.
We'll see you again next time.
