Money Psychology 6: Tails, you win
The most impressive people are packed full of horrendous ideas that are often acted upon. It’s normal for lots of things to go wrong, break, fail and fall.
Most of what we pay attention to, results from a tail event. Long tails – the farthest ends of the distribution of outcomes – have tremendous influence in finance. A small number of events can account for most outcomes.
In 2000, Heinz Berggruen, one of the most successful art dealers of all time, 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.
But the investment firm Horizon Research has an explanation:
“The great investors bought vast quantities of art. 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.”
A lot of things in business and investing work this way.
The success of Walt Disney is another such 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.
You can be wrong half the time and still make a fortune.
[The Psychology of Money: Lessons 6 of 18]
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