Many Stock Market Investors Get Rich Out By Sheer Luck

By: John_Mauldin

BY JARED DILLIAN : This is a story I have never told before and will never tell again.

I actually got my start in investing in a stock-picking competition in middle school. I picked Wang Laboratories…

Because…

WANG

Thirteen-year-old humor. Anyway, Wang was a flop, and I lost money on it. Talk about dating yourself—the old-timers will recall that Wang was actually an AMEX stock, the old curb exchange. I do miss the AMEX.

I entered another stock-picking contest my senior year of high school, in my economics class. This one was a bit more involved—my team was competing against teams throughout the state, and every week we would get a printout of the results taped to the wall in the classroom.

The economics class was full of jocks, including most of the guys I was on the wrestling team with, along with lots of the popular girls. My team was the jocks and popular girls and me. I was under a lot of pressure to come up with an idea.

Someone had actually given me a tip earlier in the year. Novell, a software company, from Provo, Utah. I think the idea was that you were supposed to build a diversified portfolio of stocks, but I just put it all in Novell.

It worked. We were one of the top teams in the state.

I actually got invited to a Board of Directors meeting at my school to talk about how we did it. I made up some nonsense that must have sounded absolutely ridiculous. I had no idea what I was talking about.

Upon reflection, all of this took place in late 1991/early 1992, and the stock market wasn’t doing so hot. About 90% of the teams in this stock market contest lost money. Even being long Novell, we made only about 15% in a few months. That’s pretty crappy on an absolute basis, but great for the middle of a bear market.

Anyway, I had inadvertently stumbled across the number one way to get rich in America: put it all in one tech stock and hang on. That was a lesson I did not internalize. I was smart enough to understand that we won based on sheer luck. Then again, a lot of people in this country get rich on sheer luck.

But Is It Luck?

Take Jeff Bezos, or Mark Zuckerberg. Two of the richest people in the world. How did they get rich? They had one tech stock (in both cases, millions of shares) and never sold. Zuckerberg is selling now, which is smart—you have to turn it into food at some point. But basically these guys invested in themselves and compounded at a ridiculous rate. They put all their eggs in one basket.

If Zuckerberg had taken Peter Thiel’s $500,000 in 2004 and put it in the S&P 500, he would have a lot less than he has today. It still would have been a great investment—I think a lot of people would be happy holding the S&P 500 from 2004 to 2018. But if you are going to be one of the richest people in the world, you have to compound a lot faster than that.

I think about compounding a lot. There aren’t many businesses that compound at 100% a year. A food truck is not going to compound at 100%. A homebuilder is not going to compound at 100%. A car dealership is not going to compound at 100%.

Pretty much the only thing that does is tech. One of the reasons Facebook paid so much for WhatsApp was its explosive user growth. It ended up not being worth $19 billion, but it looked like it would be.

Thing is, not all of us can work in tech. The type of growth rates that pushed Bezos to $100 billion are an anomaly, and probably won’t exist again for a generation or two. Even Buffett, who has beaten the S&P handily since inception, has had a tough time doing it the last few years.

The One Piece of Advice

Back to Bezos and Zuckerberg and compounding at 100%. This is why I love entrepreneurship—I would never tell you to take $100,000 and put it in SPY instead of investing in yourself. (If you invest in ETFs, I suggest you download my free exclusive report, 5 ETF Strategies Every Investor Should Know)

I don’t know if you’ve ever seen The Founder, about Ray Kroc, but the movie portrays his first wife as a bit of a suckapotamus, always throwing cold water on his ideas. Sure, starting a business is risky. It is also fun!

If you have an idea, you need to think big, and execute on it. If you have and idea, you need to think big and execute on it. There are people who think big but can’t execute. There are people who think small but can execute.

Few can do both.

Here’s the remarkable thing about both Bezos and Zuckerberg—they retained so much ownership in their companies through the fundraising process, through the IPO, and into maturity. People who think big, execute, and see it all the way through to the end are exceptionally rare.

Remember: diversification is for people who don’t know what they are doing. Which is most people. But if you have an edge, or you’re betting on yourself, put all your eggs in one basket in the stock-picking contest of life. For everyone else, there are target retirement date funds.

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