Halo Effect

This post has nothing to do with Brexit, UK’s ego, or the unfairness in life that the older generation always decides on things the younger generation has to live with.

But then, maybe it does …

Let’s visit another continent for a while.

Who has not heard of Warren Buffett?  For more than 10 years, one of the richest men on the planet.  But did you know that of his current roughly $60 billion net worth, $57 billion was added after his 60th birthday?

If Buffett had started saving in his 30s and then retired in his 60s (like many of us typically do) still achieving his roughly 20% return per year, you would have never heard of him.

His secret is time.  He started at the age of 11 and is now 84 years old.  70 over years of compounding really do make a difference.

So, be careful when you encounter human stories.  Ask for the facts and the statistical distribution behind them.  You can still be motivated by the story; however, you can then put it into the right context.

We should remind ourselves not to fall for the general inclination to draw a specific conclusion based on general impressions.

This Halo Effect pervades the business world.  For example we tend to observe financially successful companies, attach attributes (e.g., great leadership, visionary strategy, tight financial controls) to that success, and recommend that others embrace the attributes to achieve their own success.  Even researchers who study management follow this formula and rarely recognize the role of luck in business performance.

And then the media often perpetuates the halo effect.  Successful individuals and companies adorn magazine covers, along with glowing stories explaining the secrets of their success. It also works in reverse, as the press points out shortcomings in poor-performing companies.  The press’s tendency to focus on extreme performance is so predictable that we can use it as a reliable counter-indicator.

Any time you see an approach of offering secrets, formulas, rules, or attributes to achieve success, you can be sure that someone is selling you a quack remedy.

Which brings us back to Warren Buffett.  Do his secrets and rules fall under the category of quack remedy?  I don’t think so.  His rules appear to have withstood the test of time.  But then just looking at him we might be falling prey to the Survivorship Bias or maybe his extraordinary returns might simply regress to the mean in the next few years.

Could you replicate his success?  

Hardly, because I believe my reader might not have 70 years left?  No worries, just start investing on behalf of your child—on the basis of the asset that he/she has plenty of.  That asset is commonly called time.