Quick snippets from our morning read on Friday, 29th January 2021
Today’s morning read is an article about Why It’s Usually Crazier Than You Expect by Morgan Housel
I want to try to explain why Gamestop went up 100-fold in the last year and why Sears never recovered. They have to do with the same force in opposite directions. It’s a force that can explain a lot of baffling trends lately, and it’s so easy to underestimate and overlook.
Feedback loops – where one event fuels the next – often lead to that kind of bewilderment.
Find a feedback loop and you will find people who underestimate how crazy prices can get, how famous a person can become, how hard it can be to change people’s minds, how irreparable a reputation can be, and how tiny events can compound into something huge.
They take small trends and turn them into big trends with unforeseen momentum. And they happen in every field.
If you become a good reader as a child, reading is fun. When reading is fun you do it more. When you do it more you become a better reader – on and on. The opposite is true: delayed reading ability can make reading feel like work, which can cause kids to read less, which delays reading comprehension even more.
When it doesn’t rain, there’s less evaporation, which makes the air drier, which reduces rainfall, on and on.
And, of course, feedback loops can do astounding things in business and investing.
It can work wonders on the way up.
People want to shop at winning companies, and when people shop at a company it wins. A little momentum early on can grow into something enormous, well beyond what may have been predicted in the beginning. The same thing happens inside companies: Marc Andreessen says 80% of employee culture is just “winning.” The best employees want to work at companies that are winning, and when a company attracts the best employees it tends to win. If you don’t appreciate how powerful that feedback loop is you can be shocked at how dominant and wildly successful a few companies or products can become. Apple, Amazon, Tesla – they’re all enjoying the glorious feedback loop.
It works both ways.
General Motors had two options in 2008: Go bankrupt or convince the government to bail it out.
That started a debate over whether bankruptcy would cause a permanent downward spiral – even if GM kept making cars, consumers might not want to own a car sold by a bankrupt company. Fortune wrote:
… the fear that car buyers won’t want to buy cars from a bankrupt automaker may preclude GM from financing. For example, a recent survey of car buyers found that as many as 80% wouldn’t even consider buying from a bankrupt automaker.
In the end GM went bankrupt and was bailed out. But the idea that consumers would be embarrassed to buy from a bankrupt company, which would hurt GM’s sales, which would cause another bankruptcy, which would make consumers even more ashamed to own a GM car … on and on … shows that brands can change independent of a product’s quality. They get stuck in feedback loops that can be vicious – especially if you’re a household name and always in the news.
Once you look for feedback loops you see them everywhere. And once you realize how powerful they can be you start to answer some of the most frequent questions in business and investing.
How did prices get this high?
How did that company fall so hard?
How has this trend lasted so long?
Why is that company so dominant?
Why is the market so volatile?
Why is this person so famous?
Why is it so hard to break through?
The reason is usually small trends, once they get going, take on a life of their own, so things are usually crazier than you’d expect.
Read the full article here.
And as always, if you enjoyed this, check out the rest of our daily snippets, curated daily, right here on The Red Notebook.
