In his recent online lecture on Valuation, Aswath Damodaran recalls a story about his mother-in-law to illustrate how even the worst investors can get lucky. Here’s an excerpt from the lecture:
And finally if you’re ever given a choice between understanding everything there is to understand about corporate finance and being lucky which one should you pick?
Pick being lucky!
This is a business where the dominant paradigm is luck. We can’t tell you this, this is a business school, we’re selling this package of… if you get these skills no… if you’re lucky it doesn’t really matter what you do, you can be crap, and you can do crappy stuff it’ll still pay off.
If you’re not lucky you can do everything right and nothing is going to pay off, something brought home to me by my mother-in-law when she came to visit in early 2000.
My mother-in-law became an avid investor in the 1990s which to me should have been a sign that the market was topping off. Mother-in-law, big investor, get out of the market now, kind of missed that sign, and she would drive us crazy.
She’d turn on CNBC, she’d watch it all day, she made it a spectator sport. “Go Cisco Go!”. “Look it went up an eighth another quarter”.
And all day long all she would talk about what was in her portfolio, what was out of her portfolio, what she wished was in, what she wished was out, and I had to act like I was listening. That’s what son-in-laws do.
But then she let it slip that she owned Qualcomm, one of the great stocks of ’99, up 600%, and I was impressed. I asked her, Judy why did you pick Qualcomm? I knew the minute I asked this question I shouldn’t have because she told me, she said she picked Qualcomm because it owned MCI.
I said that’s not Qualcomm that’s Worldcom, she says Qualcomm, Worldcom what’s the difference? I said if you bought the stock you really meant to buy it would’ve lost 30% instead of buying some other stock that rhymes so that it makes 600%.
You can listen to the entire discussion here:
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