Skip to main content

Relatively speaking, the billionaire isn't rich. It's all relative


  1. Investing is about relative, not absolute performance

  2. Technology competition is about relative, not absolute strength

  3. Society is about relative, not absolute status

1. Don't bet on the most likely winner

Imagine you're an investment analyst [1].

Investment analysts research companies and decide which stocks to buy or sell. You've done your work on Tencent, a chinese internet company, concluding that the business, management, and macro trends all look good. Gaming and online entertainment will continue increasing in importancethe executive team is experienced, and population growth provides a tailwind for at least ten years.

You model all of that up in excel. Write a simple 5 page investment memo. Prepare 50 pages of backpocket complicated charts just in case [2].

Convinced of your brilliance and diligence, you pitch your boss on Tencent. You time your meeting perfectly, a little after he's been in the office, but before he's busy looking up summer vacation homes.

It seems to go well at first. Your boss is familiar with Tencent, having golfed with the brother-in-law of Tencent's COO. He agrees with all your points on the business, management, and macro. Great.

Coming to the end of your pitch, you're feeling good, and expect your boss to initiate a small position in Tencent. Instead, he sits back in his chair, re-opens his tabs on vacation homes, and tells you you've missed the point completely. Not so great.

What went wrong?

Where you screwed up was not considering what market consensus was. It's a mistake most retail investors make, and sometimes professionals as well.

Investing is a game of relatives, not absolutes. It's how the stock performs relative to expectations that determines whether you make above average returns or not.

All that research you did doesn't matter if it's widely known. By definition, that's already priced in to the market. What you need to show is what the market is missing, and why that misperception will correct itself. If you don't have an edge [3], your pitch is pointless.

It's why companies that post good numbers for their earnings reports can still see their stock price go down.

It's why you can get below average returns buying a great company that is priced to perfection, and why you can get above average returns buying a shitty one that was left for dead.

And it's why illegally knowing company earnings ahead of time doesn't mean you'll make money 100% of the time [4].

In investing, you want to bet on the mispriced horse, not the horse most likely to win.

This applies both at the micro level to individual stock pitches, and at the macro level to investment firm performances. Absolute skill doesn't matter. It's the fund's skill relative to competition that determines whether it can make above average returns.

It's why information such as credit card, app download, or satellite data is no longer a factor for outperformance, but table stakes.

It's why luck is playing a bigger role, since the dispersion in skill has been reduced.

And it's why the overall outperformance (alpha) for hedge funds has stagnated, as more investors know best practices and frameworks.

In investing, it's all relative.

2. Your tech relative is an eight year old

Imagine you're at a tech company selling online widgets.

You've found an advertising channel that costs you $1 to acquire a customer, and each customer gives you $10 in lifetime value [5].

Seems like a great deal, so you start spending your marketing budget on it. It works, and you start looking up summer vacation homes to buy with the extra profit.

Except you start realising the number of customers you're getting keeps going down, implying your customer acquisition cost (CAC) keeps going up. After a while, you're barely breaking even on the customers. Summer vacation dreams dashed.

What went wrong?

Where you screwed up was not considering what the market equilibrium was. It doesn't matter how efficient your marketing spend was, if your competitors were more efficient than you.

They'll outspend you, acquire more customers, make more profit, and repeat. In the process, they'll force price efficiency on the market and you. You were optimising for the local maxima; everyone else was solving for the global maxima.

It's why knowing who your competitors are is critical for business survival. If you're happy with your offline CAC as a mostly offline business, you'd better hope someone doesn't dropship your product and raise your CAC. If you're happy with your online CAC as a mostly online business, you'd better hope someone doesn't open a retail store and close you down.

It's why relative market shares are more important than absolute. The difference in spend efficiency, not the spend efficiency alone, is what compounds over time for above average returns.

And it's why word of mouth and customer loyalty is important, since it allows you to temporarily defer the effects of relative comparisons. When CAC is at a $0 floor it's no longer the limiting factor [6].

This applies not just to customer acquisition, but to every part of the company, from the talent you hire to the quality of the product you make. Knowing their strengths alone without knowing how they compare against others isn't meaningful.

In the past, when information, people, and products travelled slower, this was less of a problem. Customers would compare you against the physically closest alternatives and call it a day.

Today, the relevant relative is everywhere and everything. You're competing against 8 year old toy reviewers and engineers outsourcing their own jobs to China so they can surf reddit. The effect of tech has reduced the importance of physical proximity.

It's the Red Queen hypothesis playing out, with companies needing to constantly find an advantage, and the race getting quicker every year. Discoveries get shared and commoditised over time, constantly eroding your advantage. Once you have no advantage, you earn average returns.

In tech, it's all relative.

3. Relatively speaking, the billionaire isn't rich

Imagine you're just trying to live your life.

No wait, you don't have to imagine, that's all of us.

You've read the self-help books, gone for that zen retreat, and watched that TED talk. They all tell you to focus on improving yourself, and be less obsessed with comparing against others.

Even Google returns 1.8bn results for "don't compare yourself to others" vs 0.4bn for "how to compare yourself to others". And the top results for the latter are all articles on how to stop comparing.

And that's true. You should be focused on improving yourself, and trying to be 1% better every day.

But you already know where I'm going with this.

There’s a difference between what people say vs what they actually do. You can judge yourself on an absolute standard, but everyone else judges you on a relative one. Relative to their expectations of you, or relative to someone else.

Society is one big sorting algorithm [7].

It's why we like supporting the underdog, the turnaround story, or the long shot. We reward people for performing better than expected, and care less about people that perform as expected, even if they've been great all the while. There's even a whole bible parable about it, the prodigal son [8].

It's why we obsess over quantifiable metrics that can demonstrate our relative status to each other. Followers, likes, shares. As long as it's something that can show where we rank in comparison, we'll always desire it [9].

And it's why Goldman Sachs CEO and billionaire Llyod Blankfein doesn't feel rich, since he's comparing himself against his multi-billionaire friends.

What should you do then?

Under promising and over delivering seems to be a popular way to go. People sandbag expectations and anchor others to lower performance because it works [10].

Choosing your own set of competitors to compare yourself against might be another way. If you're not happy with your peer set, there's a billion people out there to swap with.

And you should still seek to measure yourself by your own scorecard, and get better for its own sake. Just know that it's not how others are measuring you.

In life, it's all relative.


Popular posts from this blog

How the Python import system works

How the Python import system works From: If you ask me to name the most misunderstood aspect of Python, I will answer without a second thought: the Python import system. Just remember how many times you used relative imports and got something like  ImportError: attempted relative import with no known parent package ; or tried to figure out how to structure a project so that all the imports work correctly; or hacked  sys.path  when you couldn't find a better solution. Every Python programmer experienced something like this, and popular StackOverflow questions, such us  Importing files from different folder  (1822 votes),  Relative imports in Python 3  (1064 votes) and  Relative imports for the billionth time  (993 votes), are a good indicator of that. The Python import system doesn't just seem complicated – it is complicated. So even though the  documentation  is really good, it d

On working remote

The last company I worked for, did have an office space, but the code was all on Github, infra on AWS, we tracked issues over Asana and more or less each person had at least one project they could call "their own" (I had a bunch of them ;-)). This worked pretty well. And it gave me a feeling that working remote would not be very different from this. So when we started working on our own startup, we started with working from our homes. It looked great at first. I could now spend more time with Mom and could work at leisure. However, it is not as good as it looks like. At times it just feels you are busy without business, that you had been working, yet didn't achieve much. If you are evaluating working from home and are not sure of how to start, or you already do (then please review and add your views in comments) and feel like you were better off in the office, do read on. Remote work is great. But a physical office is better. So if you can, find yourself a co-working s

Todo lists are overrated

My tasks come from a variety of sources: 1) Tasks from emails  2) Meeting notes with details of people who participated  3) Project related tasks that can have a long format and can be tagged/ delegated  4) Scratchpad for unrefined ideas  5) Detailed documentation for completed technical tasks / ideas  6) FIFO list of high priority small daily tasks No one app has been able to map all the requirements above, and I have tried a lot of them! In my lifetime I’ve tried a dozen todo apps. In the beginning they all seem different, novel and special. Slick UI, shortcuts, tags, subtasks, the list goes on and on. But all our stories were the same: I start using the new app, then after awhile I stop using it. Up until the last week I thought the problem was in myself (you probably think so too). After all, David Allen seems to have figured this shit out. Also there are people leaving long 5 star reviews on every major todo list app, they discuss them on forums, recommend them to friends. But the