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The Psychology of Money

Tails, You win

(Chapter 6)

Story of the art collector Heinz Berggruen. He amassed an amazing collection of Picassos, Braques, Klees and Matisses.

 

People were amazed by his art investing acumen.

 

The reality was that he bought massive quantities of art. Only a subset of his collection was valuable.

 

“Berggruen could be wrong most of the time and still end up stupendously right.”

 

“Anything that is huge, profitable, famous, or influential is the result of a tail-event—an outlying one-in-thousands or millions event.”

 

This is the venture capital model: If a fund makes 100 investments, they expect 80% to fail, a handful to do reasonably well and 1-2 to drive the funds returns.

 

Consider the distribution of winners and losers in the stock market: most public companies fail, a few do ok and a few generate extraordinary returns.

 

“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.”

 

Warren Buffett stated at the 2013 Berkshire Hathaway shareholder meeting that he’s owned shares in 400-500 different companies over his life. His significant gains came from just a handful: 10.

 

We see outsized results from a mere fraction of the events or actions in our lives.


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