Just because someone has made a lot of money from investing, doesn’t mean they have any special insight into the rest of the world. In fact, it is quite possible they don’t even have a good understanding of investing.
In his book Drunkard’s Walk: How Randomness Rules Our Lives, physicist Leonard Mlodinow uses the baseball World Series to explain how a lot of the time the best team will not win. In the World Series, a team needs to win four matches out of seven to be crowned champion. Going into the series, if one team is clearly better, they might have a 55 per cent chance of winning each match. However, even in this situation, the weakest team will win the series 40 per cent of the time.
Instead of baseball teams imagine these were professional investors. If a hedge fund manager is worse than average, there is still a 40 per cent chance that they will beat the market in four or more of their first seven years. Once a manager has had a few good years they can get the ball rolling on fundraising and ride out the rest of their career taking a healthy management fee.
Now imagine there are 1000 of these slightly incompetent managers. What are the odds that none of them will beat the market in four or more of their first seven years? Well, it is 0.6 to the power of 1000, which is 1.42×10 to the power of -222. In other words, it is effectively guaranteed that some of them will have successful careers and make millions.
People look at the handful of obscenely rich fund managers and assume they made their money through skill. When, in fact, it is likely a significant number are worse than average at choosing investments. Of course, some of them might be better than average but it is impossible to know without a significant sample size, which will never be available in a fund manager’s short career.
In the last year, Pershing Square’s Bill Ackman has used his platform to transcend his position as a hedge fund manager. He has attracted 1.2mn followers on X (formerly Twitter) by posting about a range of topics from the war in Gaza to gender identity politics, as well as driving a campaign to get previous Harvard president Claudine Gay sacked.
More recently, he pinned a Tweet which included a speech from right-wing Dutch political activist Eva Vlaardingerbroek at the Conservative Political Action Conference in Hungary. In the speech, she provides four anecdotal examples as evidence for migration into Europe causing an increase in violent crime. One of these stories includes a stabbing in London. As we learnt from Drunkard’s Walk, this is irrelevant. In the same way we are likely to get a few incompetent hedge fund billionaires, it is almost certain that on a continent of more than 700mn people, there will be many crimes involving immigrants every week.
What she failed to cite was that in the UK homicide rates have fallen from a peak of 17.9 per million in 2003 to just 9.9 per million last year, according to the Office for National Statistics. She also failed to pull up this paper which looked at more than 75 years of data including second and third-generation migrants. Presumably, because it showed that the net fiscal impact of the average immigrant was positive.
Immigration is a legitimate topic of political discussion. However, the fact Ackman would mention this unsubstantiated speech from a known conspiracy theorist as something that requires legitimate consideration draws into question his understanding of basic probability.
Although random chance can elevate underserving people into positions of power, it doesn’t mean you should sit back and let fate take its course. What we can learn from Ackman is that you can increase your odds of success by working harder. The New York Times reported that when he started his first hedge fund straight out of Harvard, he raised the money by cold-calling more than 100 members of the Forbes 400 list. Of these, four invested. By persistence, he increased his surface area for good fortune.
None of this is to say that all fund managers are lucky and incompetent. Or even that Ackman doesn’t have an insight into the market that exceeds the average investor. It is simply that we don’t know. So, no matter how rich someone is, always apply the right amount of scepticism to their words. Be it about investing strategies or anything else.
