Page 79 - Psychology of Money - Timeless Lessons on Wealth, Greed, and Happiness-Harriman House Limited (2020)

And then it failed.

COBACOBA
The blockbusters stopped, a few big-budget projects flopped, and by the
mid-1990s Carolco was history. It went bankrupt in 1996. Stock goes to
zero, have a nice day. A catastrophic loss. And one that 4 in 10 public
companies experience over time. Carolco’s story is not worth telling because

it’s unique, but because it’s common.

Here’s the most important part of this story: The Russell 3000 has increased
more than 73-fold since 1980. That is a spectacular return. That is success.

Forty percent of the companies in the index were effectively failures. But the
7% of components that performed extremely well were more than enough to
offset the duds. Just like Heinz Berggruen, but with Microsoft and Walmart
instead of Picasso and Matisse.

Not only do a few companies account for most of the market’s return, but
within those companies are even more tail events.

In 2018, Amazon drove 6% of the S&P 500’s returns. And Amazon’s growth
is almost entirely due to Prime and Amazon Web Services, which itself are
tail events in a company that has experimented with hundreds of products,
from the Fire Phone to travel agencies.

Apple was responsible for almost 7% of the index’s returns in 2018. And it

is driven overwhelmingly by the iPhone, which in the world of tech products
is as tail-y as tails get.

And who’s working at these companies? Google’s hiring acceptance rate is
0.2%.²² Facebook’s is 0.1%.²³ Apple’s is about 2%.²⁴ So the people working

on these tail projects that drive tail returns have tail careers.

The idea that a few things account for most results is not just true for
companies in your investment portfolio. It’s also an important part of your
own behavior as an investor.

Napoleon’s definition of a military genius was, “The man who can do the
average thing when all those around him are going crazy.”