Apologies for the complete lack of any activity on the blog over the past month, it’s been pretty hectic and… Oh who am I kidding, I’m making excuses. I fell behind with my writing, got out of a daily routine and the rest is history.
So I’ve just returned from a pretty enlightening trip to Italy. Enlightening in almost every sense. Gastronomically (arancini where have you been all of my life), culturally and also from a personal development point of view. I finished off two pretty fantastic books (Ikigai and The Miracle Morning) and got mid-way through a third. I’ll be talking about the other two in more detail in future posts, but today I want to focus on the book I am yet to finish but has already radically changed my outlook on the world.
The Black Swan is a book written in 2007 by Nassim Nicholas Taleb. To briefly summarise the book:
The book focuses on the extreme impact of rare and unpredictable outlier events — and the human tendency to find simplistic explanations for these events, retrospectively. Taleb calls this the Black Swan theory.
One of the most fascinating parts of the book, and I’m only around 30% through it, is a discussion on data/outliers.
Human beings always like to apply reason to a situation. We always need a because. X happened because of Y.
What we don’t like to attribute things too, is sheer luck. Luck is unexplainable and from a personal point of view is something I’ve never quite believed in. You make your own luck is a saying I would go as far as to say I live by. But stick with me for a minute.
‘Luck’ as far as probability goes
Let’s run a small thought exercise, on a hypothetical situation around blogs. Like a lot of people who blog, tracking your views/readership can be a bit of a disheartening task at times. So let’s take 1,000 blogs around a similar subject and line them all up.
Statistically, a small number of these blogs will be superstars. Now, this next part some people may disagree with massively. But what reasons do these blogs have for being any more popular?
Did they work any harder than the majority? Almost everybody who writes has a reason for doing it, you’d imagine at least a subset are working equally as hard.
Did they do anything dramatically different? You don’t have to look very hard to find a trillion articles on what makes a successful blog. It is reasonable to assume a good portion of these people are following these guides.
Could it be that these people are just the lucky ones? The statistical anomalies? The Outliers? It’s a fascinating thought.
Quick disclaimer, I’m not for one second taking away the monumental effort it takes to run a successful blog. Or that the top bloggers don’t have immense talents. I’m merely suggesting that there are equally hard-working and talented people out there.
How data skews are thinking
The biggest problem is how we access the data available to us.
A successful blogger will be well known and can shout from the rooftops about the ‘steps to success’. But we never hear from the people who put in equal amounts of work but failed? Who didn’t make it?
Let’s take an argument proposed by Taleb centered around beginners luck in gambling. Gamblers always say beginners are more ‘lucky’ than anybody else. But if we explore that a little further with two people; let’s call them Colin and Janet.
Colin starts gambling and has a huge payday on his first time at the roulette tables. Janet, on the other hand, has a terrible time loses a bunch of money and vows to never gamble again. A gambler who is lucky in the beginning is much more likely to keep gambling. Janet simply falls out of our dataset.
This can lead to a huge bias in perceived ‘beginners luck’. Nobody has, beginners luck per-say. It’s just the lucky ones tend to keep gambling and stay within our dataset.
That’s quite a leap
Yes, I appreciate that. But it’s a purely theoretical argument. Mainly aimed at just asking you to take a look at the world a little differently. There is no need to believe everything you read or here because a statistic or a set of data tells you so.
For a moment, let’s apply this same thinking to the world of financial independence and the commonly perceived ‘best’ way to invest within the FI community. Low-cost index funds are the best way, and there are scores of people who can advocate this approach.
But are there people out there who have invested in this way and not been successful? Of course, there will be. You and I have as much chance as becoming that person as anybody else. The sequence of returns risk, well-diversified portfolios and monitoring current events. Well, that could all go out of the window if there is another 1929 the day before you’re due to retire.
The second problem with data
Data is an unforgiving bitch when it comes to our perception of future events based on the past. We, as humans, are awful at predictions. Period!
Take almost any major event that has ever happened, was it predicted? Well of course not or else it wouldn’t have happened. But you can almost guarantee that before it did happen there were plenty of people predicting things will continue to be as they have always been and never change.
Humans do not like change.
This is one of the biggest things I have started questioning recently, mainly centered around financial independence but equally as relevant to almost all aspects of our lives.
It was first proposed to me over Christmas whilst out for a drink with my partner’s Uncle. We were talking about our respective investment strategies, and I was explaining the benefits of low-cost index fund investing. To which he proposed a very relevant point:
But what if the stock markets cease to exist?
And isn’t that just a fantastic point?
According to historical records, the average annual return for the S&P 500 since it began as the Composite Index of 90 stocks in 1926 through 2018 is approximately 10%. (Investopedia, 2019). That is fantastic, for nigh on 100 years the S&P 500 would double your money around every 10 years.
But what if the S&P 500 ceased to exist tomorrow?
A lot of people would call me crazy, and refer back to the fact that it has been functioning for 100 years.
But after the horror and bloodshed of WW1, if you had told people they’d be doing it all again just 21 years later they’d probably call you equally as crazy.
We all, quite naively, think that the future will continue to be like the past ergo I should do the same as people have always done.
Just reading back through this post before closing off I realize it’s a little pessimistic and extremely skeptical.
For the record, I still believe that low-cost index funds are the current best possible way to invest money. I also have huge respects for other bloggers out there who put in hours and hours of work and are extremely successful (and also, not so successful).
In closing, I’d just like to ask you to think about things a little differently. That is all. Don’t take everything you see or read as pure fact, question everything. And in questioning everything, you will reach the best possible outcome.
“In questioning everything, you will reach the best possible solution”