Peter Thiel’s Success: Luck or Skill?

Scott’s review of Peter Thiel’s book Zero To One

In the past I would have been more inclined to dismiss/discount the role of luck, but luck plays a huge role in Peter Thiel’s success, possibly much more than we realize or wish to accept. There are plenty of tech entrepreneurs who are as smart–if not smarter–than Thiel yet are not nearly as successful in terms of wealth and social status, obviously given that there are only 2,208 billionaires alive and Thiel is one of them. A few years can make a huge difference. What if Facebook was launched in 2002 instead of 2004? Then it may have have been too big by the time Thiel was able to invest in 2005, so instead of getting a massive 10% stake in the company, he maybe would have only gotten 1%. That makes the difference between $1 billion and $100 million. Or what if Facebook never happened at all? Then maybe he would have invested his money in less successful stuff and earned nothing or even lost it all. Or Mark Cuban, who sold his start-up at the height of the 2000 tech bubble to Yahoo, making him an instant billionaire. Not long after, Yahoo wrote broadcast off as a total loss, so had Cuban waited a year or two longer, he would maybe only be multi-millionaire instead of a billionaire, and no Shark Tank for him.

This is similar to Bitcoin returns. Just to get an idea of how important timing is, had you bought Bitcoin in January of 2017, you could have sold a year later for 1,800% return. Had you invested in January 2018, however, you would have lost 85% of your money so far. This sort of stuff happens all the time, in which all the returns are concentrated within a small time frame and most people are late to the party. Those who invest early are lauded by the media for their prescience and genius, but those who are late yet also smart are swept under the rug of history and forgotten. I saw this firsthand in the Bitcoin bubble. Many smart people lost tons of money trying to emulate their investing heroes, because they were merely a year too late. Even within cryptocurrencies there is a lot of luck and variability of returns. Had you invested in Bitcoin at the peak, you would have ‘only’ lost 85% of your money. Bitconnect? All of it.

Scott writes:

But how much of a flaw is it that the Reber Plan would in fact not have worked? Suppose a thousand enterpreneurs try to create exciting long-term plans for their businesses, each of which requires guessing ten binary variables in advance. And suppose the vague-ists are right, nobody can do armchair reasoning or long-term planning, and all of their guesses are random. By chance, one of the thousand entrepeneurs will get all ten variables right, his plan will go perfectly, and he’ll become a multi-billionaire and land a rocket on Mars. He will be the only person we ever hear about and the only person who ever becomes a stock example, and it will look like “Wow, multi-step reasoning and long-range planning can work well after all!”

I agree. All his variables aligned correctly, producing the huge success that we all know of. If just one of those variables were misaligned, maybe he would ‘only’ be a Steve Wozniak instead of as rich and famous as Steve Jobs.

There’s a ton of post-hoc reasoning and survivorship bias in these success stores, Thiel and others. If 1,000 smart, determined people follow the same formula, and the single person who succeeds attributes his success to wearing a chicken suit, suddenly that will seem like genius advice worth emulating, according to the media.

That is not to deny that skill exists. If multiple people have similar backgrounds/circumstances and have similar expertise, yet some are much more successful than the others, then skill likely explains differences in individual outcomes. For example, many investment managers/experts wrongly predicted in 2008-2011 high inflation, recession, and a bear market. That is indicative of poor ability/skill relative to someone such as myself and others who foresaw low inflation and strong performance in equities and the U.S. economy, and were correct. Same for fund mangers who invested in emerging markets, which have done far worse than U.S. equities. Given that all these managers and experts have access to the same data analytic tools and information, then skill maybe plays a role, especially if someone is able to forecast correctly at a rate that cannot be merely ascribed to chance, and are able to justify their reasoning in a manner that demonstrates an understanding of the underlying fundamentals at work, than just guesswork or coincidences. Warren Buffet is lucky, but also by being able to consistently outperform his peers for so many decades, demonstrates an underlying skill in how he invests. Same for Renaissance Technologies, lead by mathematician turned hedge fund manager James Simmons, which has the highest returns of any hedge fund in history. Harris’ high IQ (as well as his team of genius PHDs) allowed him to find strategies that eluded everyone else.

I see evidence of demonstrable skill on stock and option trading communities such as /r/wallstbets. There are traders who consistently make tons of money with options, by choosing optimal positioning sizing, duration of option expiration, and choice of underlying stock. Even though they occasionally lose money, their system is refined in such a way that the expected value is strongly positive over the long run, because the winners far exceed the losers in frequency and or size. Others invest in stocks that are undervalued or overlooked and make a huge return when the stock returns to its ‘true’ value. One person made half a million dollars over a 4-year period, for a total return in excess of 150% versus 50% for the S&P 500, by correctly predicting that the U.S. government would diminish or relinquish its conservatorship of Freddie Mac and Fannie May. Stories like this are not that uncommon. A misconception is that the EMH precludes exceptional skill and returns, but in agreement with Scott, it can be beaten. The EMH is most applicable for short time frames in the aggregate, but that does not mean over longer time frames that excess risk-adjusted returns are not possible. In the short-run, stock prices appear random, but in the long-run, clear trends and winners emerge.

The problem with Peter Thiel is that the sample size is insufficient to disentangle the role of luck from skill. There are so many other factors, such as being at “the right place at the right time.” Someone like Warren Buffett has had dozens of successful investments, for more than half a century, not just a handful of winners.

This is the proper canned response that the conformist parts of my mind generated after three seconds. But is it true? Elon Musk has founded at least three super-successful companies that have executed decade-long plans; lightning shouldn’t strike the same place twice. Newton didn’t just discover gravity, he discovered optics, calculus, the laws of motion, and [insert ten page list of other things Newton discovered here].

Scott argues that Thiel and Musk being successful at multiple companies refutes or minimizes the role of luck. But does it? I disagree. The reason is, these are–statistically speaking–conditional events, resulting in a sort of self-fulfilling prophecy. Being successful at one company greatly improves the odds of subsequent companies succeeding, due to being able to use other people’s money, so one’s personal wealth is sheltered, and being hugely successful once opens the doors to further opportunities. Due to name recognition, Thiel and Musk can raise a ton of money from a bunch of eager investors, take a 10% personal stake, and now have a second successful company while creating more wealth for themselves and bearing little to no risk. It’s not like Musk had to risk his own personal wealth and reputation to create Space-X like he did with Tesla, and the relative failure of Solar City did not hurt his personal wealth or his reputation. Same for Peter Thiel, who whose fund Clarium Capital floundered in 2011 after making some ill-timed bets on oil and Treasury bonds. All you need is one huge success to override a bunch of smaller failures, which will be forgiven and mostly forgotten. In stock trading, however, events are unconditional. This means if I have a trading system with a 50% success rate, a success on my first trade, excluding the ‘hot hand’ effect, has no bearing on the success of my second trade.

Furthermore, Thiel’s initial success at Paypal allowed him to invest in Facebook so early. For the average person, such opportunities don’t exist and they are stuck with 11% annual returns in the S&P 500, versus 1,000%+ annual returns with pre-IPO Facebook or pre-IPO Uber (although VC-backed companies can and do fail, the expected value is higher than chance, such as buying a lottery ticket, which by design has a negative expected value). Even attending Stanford, one of the most prestigious selective universities in the world, significantly upped his odds of success later in life by bestowing him invaluable social capital that he would have not gotten elsewhere, especially being that Standard is in the Bay Area, and this was during the 90’s when the world wide web was still in its early stage. And also by winning the ‘birth lottery’ by having a high enough IQ to get into Stanford, which again, is luck. So many things aligned correctly to produce someone like Thiel. Is this unfair? Maybe, but genetic variability in talent and ability is what makes life interesting and exciting and leads to innovation; otherwise, everyone would be the same and there would be stagnation.

Regarding competition and monopolies, from the perspective of the entrepreneur, having a monopoly and fat margins is better than competition and slim margins, but from the perceptive of the consumer, possibly not as good. For some reason this insight was posited by Thiel and reviewers as being revolutionary, almost akin to Nash’s Equilibrium refuting Adam Smith, but it seems fairly obvious/self-evident.

To add, I was wrong about the Thiel Fellowship, which every year pays 24 exceptional students $100,000 to not attend college. A common criticism is that the program has produced few successes. Contrary to popular belief (and this is where I was wrong), it is NOT a start-up incubator like YCombinator. Rather, it is similar to the MacArthur Fellows Program in that the money can be used at the recipient’s discretion. I think the Fellowship is a great idea and is similar to the high-IQ basic income I have proposed, although the amount of money per recipient is much higher, and the high-IQ basic income would be federally funded. Although the odds of any one genius in particular producing a successful tech company or revolutionary discovery are small, it’s still much higher than the baseline population, in which the odds are pretty much zero.