A friend took me out for coffee and gifted me Gladwell’s Outlier at the 2009 bottom. “This is dedicated to your doomed outlier”. During those murky times, the negative outliers were moving to a positive polarity (worst stocks were becoming potential outperformers). Three years later and many outliers later, Gladwell’s lucid narrative on the history of success started shining brightly in my heap of books. It was time for me to read it and explore the connection between price performance and success.
For Gladwell, success was being at the right time and the right place. He connects historical success stories of 150 years to explain how success was not just an act of genius but a series of circumstances that created Gates, Jobs, Rockefellers and Beatles. The author goes step by step demystifying the process of success. Starting from IQ surveys, which were mapped with success over a decade, the author illustrates how intellect and achievement are far from correlated, how there were more Nobel Prize winners from outside Ivy League.
According to Gladwell, “power distance index,” is a term from cross-cultural psychology describing the hesitancy of subordinates to question superiors. Culture can effect catastrophes and create superstars. He quotes Asian persistence as the reason why Asians are better in mathematics. Uncertainty avoidance i.e. how well a culture tolerates ambiguity is also cited as reasons for poor performance. Coincidentally, it’s Greece and Portugal that tops the list.
Coming to look at it, what Gladwell suggests is that success is, to a certain degree, random. If you were born at the right place at the right time and did the right things, you would achieve success. Just doing the right things was not enough, the combination of when and where was magical. The Gladwell opinion is old wine in new bottle. Taleb said it in a different way. “A hedge can turn profitable owing to a rare volatile occasion”. Taleb’s put bleeds and waits for the right time. While Gladwell’s characters wait for the limitations of a generation to turn into an advantage at a future time.
And then we have some physicists who share a similar opinion. “The cold earth came near the hot sun at the right time and life happened.” Though randomness is under attack, it still sells. All talk of randomness is an illusion, which takes us away from the temporal character of nature. Success like everything else is a temporal event. And just because Warren Buffet was born in a demographic trough does not insulate him from a meltdown. You could be lucky being on one side of the outlier spectrum, but you need to have God next to you when you hit the other outlier extreme. Success is more about preparation, more about virtues than about “where and when”. This same success is prone to failure despite the “where and when”. Gladwell’s cultural determinism might be able to explain Facebook’s journey too, but at the end of the day, cause and effect are just nice stories.
Outliers are prone to reversion. This is why limitations of generations turn into advantages of the generations. It is this same reversion, which reflects in risk and returns, in society and science, in everything organic. In a recent paper published at SSRN called Mean Reversion Indexing, we illustrated how outliers in large groups were prone to mean reversion even in non-price data. Worst outliers had a 60 percent chance to bounce back. Success is about understanding the time we live in, the adversity and the counter-intuitiveness which accompanies opportunities. And, just because there were tough times, the limitations of wars and holocausts, the tough times should not make us believe that we are doomed to be a negative outlier.