Venture capital has a notorious habit of picking hundreds of companies to invest in expecting the best-performing few to return enough to fulfill the company's hurdle return. From 2004-2014, 65% of venture financings lost money, two and a half percent gained 10x-20x, one percent returned more than 20x-50x, and half a percent had returns exceeding 50x. What if I said the Russell 3000 followed a similar trend? The Russell 3000 is a broad-market index that represents the largest 3,000 publicly traded companies in the U.S. by market cap. This is deemed as a benchmark index fund, (similar to the S&P 500) it represents the broad market quite accurately. J.P. Morgan Asset Management released the distribution of returns for the Russell 3000. Over the measured period forty percent of companies lost 70% or greater and never recovered. Effectively, all of the index’s overall returns came from the top 7% of companies that outperformed the market by at least two standard deviations.
It's crazy to think that if you owned individual shares of any company within the Russell 3000, there was nearly a 50% chance the stock lost an unrecoverable value; hence, the emphasis on diversification and buying index funds as opposed to individual shares. This illustrates that individual shares burden more risk the longer you hold it; opposite of what you expect out of your long-term holdings.
Let this list illustrate the extremes of people based on their impact. Some are clearly good for the progress of humanity, and some have set the world back a quantifiable amount. It’s fair to say that all of these people are the results of tail events that led to additional tail events that changed the global stage. For example, 9/11 made the Federal Reserve lower interest rates, which partially fueled the 2008 market bubble, leading to unemployment, forcing more students to get a degree, resulting in 1.6 trillion in student loan debt. People forget that tailwinds snowball. 0.0000001% of the population enacted change (extremely good or extremely bad) that could have never been predicted in any investing algorithm – however, they shifted markets, borders, advancement, and social norms an undoubtable amount.
The average bullpen reliever in the MLB made $3 million in annual salary. He probably compares his earnings to someone like Mike Trout who made twelve times more clocking in at $35.8 million. A successful hedge fund manager who made $340 million last year probably compares himself to the top five hedge fund earners of 2018 who brought in upwards of $770 million. Those five probably look up to someone who made billions i.e. Warren Buffett, who brought in $3.5 billion dollars in 2018. The trend continues: Bezos 24 billion… The point here is that it's easy to conclude a majority of these people have compared themselves to someone that did better quantitatively. Ultimately forcing them to make riskier and less level-headed decisions to catch up with others. At this time they fail to account for some of the key drivers of happiness: reputation, freedom, independence, friends, and being loved by those you want to love you. Lots of the positions these individuals hold require work weeks that prevent the enjoyment of this list; moreover, they will maintain those habits till they retire at 70 or 80, or in Warren Buffett’s case, he is still going at 94. Now, I’m not saying Warren Buffett doesn't have a loving wife or a Saturday to himself; however, I am saying these individuals miss key life moments and take risks with their body, mind, and finances, that many people would likely/wisely avoid.
Optimism is a spectrum of variance that includes good outcomes and bad outcomes, with the mean slightly favoring your future. It’s part of the reason you hear college students apply for 200 internships. It's not because they think they are going to hear back from the 200 companies, it's because one company's response could change the course of their life and future generations. The more times an event of chance occurs, the greater chance any possible outcome will happen over a distribution. This is the same with markets, investing, and jobs. One correct roll of the dice and the roll will repay everything else.
Since 1850 some notable things have happened in markets…
The movie “The Big Short” which is based on the 2008 financial crisis, follows the true events of hedge fund manager Michael Burry. Burry accurately times his short position on Mortgage-Backed Securities. His position made $750 million in gains for his clients and $100 million in additional personal gains during 2008. What the movie fails to illustrate is that he later predicted market crashes in 2015, 2016, 2017, 2019, 2020, 2021, 2022, and 2023… If investors followed his opinion in this period, they would have lost out on 500% S&P 500 returns, 1,500% returns in the tech-heavy QQQ, and a 25,000% return in NVIDIA. The moral of the story is that no one has accurately timed a fraction of market crashes, let alone a majority. It's imperative in your journey towards financial returns that you don't try to outsmart the market; it's imperative that you hold, hold, hold, and hold again, don't touch it.
Even with the financial knowledge I've gained through my degree, The Psychology of Money challenges traditional taught views on wealth by emphasizing that financial success is more about behavior than intelligence. These six sections were some of my biggest takeaways as they illustrated the role of patience, humility, and adaptability in building lasting wealth. The book serves as a reminder that money is not just about numbers, it’s deeply tied to our emotions, experiences, and perspectives; Ultimately, it encourages readers to rethink their relationship with money, making financial decisions that align with building habits rather than chasing quick returns. This perspective makes The Psychology of Money a must-read for anyone looking to build not just wealth, but financial peace of mind.
