It’s Supposed To Be Hard

In 1990, David Letterman asked his friend Jerry Seinfeld how his new sitcom was going.

Jerry said there was one frustrating problem: NBC supplied the show with teams of comedy writers, and he didn’t think they were getting much good material from them.

“Wouldn’t it be weirder if they were good?” David asked.

“What do you mean?” Jerry asked.

“Wouldn’t it be strange if they could all just produce reams of hilarious material day after day?”

Recalling the conversation a few years ago, Seinfeld laughed and told Letterman: “It’s supposed to be hard.”

Of course it is. There is no world in which even the most talented comedians are consistently good.

Many things are governed by that truth.

Every investor knows, or should know, the truth about money management: More than 80% of professional investors underperform their benchmark (more depending on how you calculate it). Those stats are used in an often cynical way to show how the industry is broken, crowded, and ineffective.

But wouldn’t it be weirder if it were different?

Wouldn’t it be strange if every slightly ambitious investor could pick a few stocks and earn returns capable of generating dynastic wealth with other people’s money? Or even most of them? How and why could that world possibly exist? The reason Warren Buffett is interesting is because there’s only one of him.

About 1% of college basketball players make it to the NBA. That funnel doesn’t seem odd – no one would say college basketball is broken, or a scam, or ineffective at developing great players. It’s obvious that getting to the NBA is really hard, and you can be talented and still not make it. The entire reason pro sports are exciting is because the players do something almost no one else can do. Michael Jordan is interesting because there’s only one of him.

I think that logic breaks down in investing for a couple reasons.

1. Professional investors generally need other people’s money to invest. If a college basketball player doesn’t make it to the pros, no one except maybe himself feels as if the goal wasn’t reached. But if you invest your money with a professional investor and they fail to perform, you and your spouse and your kids and college’s endowment might feel cheated and disappointed. There is more collateral damage in investing than other pursuits.

2. The barriers to entry in investing are low. Every year there is a story about someone starting a successful hedge fund from their dorm. People love these stories. But imagine a story where an eager med student was performing surgeries from their dorm – it’s impossible and illegal. Professional money management requires no credentials and has few startup costs. That increases the number of people who try their hand – there are now more than 16,000 mutual funds and 10,000 hedge funds in the US. For perspective there are 15,444 Starbucks locations in the U.S. It’s inevitable that the vast, vast, majority will be mediocre at best.

The thing to keep in mind is that in any endeavor that has the potential to deliver big rewards, the best you can do is put the odds of success in your favor, which means recognizing that if you make 100 attempts at something, 99 of them might be failures but one might be an enormous win.

Comedy works like that, too.

The Chris Rock I see on Netflix is flawless. The Chris Rock that performs in dozens of small clubs each year is just OK. No one is so good at comedy that every joke they write is funny. So every big comedian tests their material in small clubs before using it in big venues. Rock explained:

When I start a tour, it’s not like I start out in arenas. Before this last tour I performed in this place in New Brunswick called the Stress Factory. I did about 40 or 50 shows getting ready for the tour.

One newspaper described Rock at the Stress Factory fumbling with material to an indifferent audience. “I’m going to have to cut some of these jokes,” he says mid-skit.

It’s supposed to be hard.