Burton Malkiel

Burton Malkiel joined Barry Ritholtz to talk about markets, psychology, and technology on the Masters in Business podcast. The two covered a lot of familiar ground, so let’s get to it.

1/ More people means more competition. “As more and more good people get into something the opportunity goes away.” “The problem is, as the market gets more and more professional, when people are better trained, when people have better sources of information…it’s then harder and harder to actually beat the market.”

Nate Silver said this about playing poker, “I got out in 2007 when the games got a lot tighter.” Napoleon Bonaparte biographer Paul Johnson wondered what would have happened if the little emperor had taken the fight to the America’s rather than Europe. Jim Chanos said part of the reason he’s succeeded is because he has “a little market niche.”

2/ The “Hold my beer” effect. “You ask a group of 200 students, are you a better driver or a worse driver than all the other students in the room, and 90% of them say they are better than average. It’s like Lake Wobegon, we’re all better than average.”

This effect operates on two levels, the macro and micro. At the macro level we know: 90% of people can’t be above average drivers. Charlie Munger puts it this way, “the iron rule of life is that only 20% of the people can be in the top fifth.” From a macro point of view we get statistics that suggest the odds are long.


I (We) laugh at “hold my beer” gifs, but sometimes those people nail it, and on the whole we’re better for it.

 We believe in something beyond the numbers, ourselves. In Antfragile Nassim Taleb wrote that we should thank the people who try. The odds are against them, but through their trials, successes, and failures we all benefit.

3/ POTRT. Ritholtz asked, “Why is stock picking so difficult?” Malkiel responded, “Partly the reason is that there are so many people doing it and that they are so professional in doing it.”

Part of the reason thinking (POTRT) is a helpful idea. I did a podcast episode on it and Sanjay Bakshi explained it in another. David Chang spoke about how POTRT relates to restaurants and we drilled into how it relates to CEO pay. Everything has many reasons, figuring out the different parts is valuable.

4/ Simple signs are the best signs. “The one thing I’m absolutely sure about in financial markets; the lower the fee I pay to the purveyor of the investment service, the more there is going to be for me.”

“Whoa,” I thought, when I first saw an investment prospectus. There were a lot of numbers. And charts. I picked the ones that looked like stairs, each subsequent bar graph higher than the one before. I gave a brief glance and even briefer thought to the “past performance is not indicative of future results.”

In choosing complexity I failed to choose simplicity. Simple models are often the best. Charlie Munger’s models like  the “cancer surgery model” are simple ones that can be used over and over again. Genius is simple. When Stephen King spoke with writers he says, “I always started by telling them not to be too concerned with stuff like weird verbs (swim, swum, swam) and just remember to make subject and verb agree. It’s like we say in AA—KISS. Keep it simple, stupid.”

Don’t think simple is easy though.

– “I’m talking about nothing but plain vanilla stock picking. That, believe me, is complicated enough.” Charlie Munger

– “Such (leadership) concepts are simple, but not easy.” Jocko Willink

– “But though this is very simple, it does not mean it is easy.” Timothy Gallwey.

5/ Low overhead. “When Jack Bogle first met Warren Buffett they were at a hotel together and Jack recognized Warren, went up and introduced himself, and he said to Warren, ‘you know the thing I really like about you is you have rumpled suits just the same as I do’ and Jack and Warren have become very good friends.”

This anecdote from Malkiel was great. Beyond (further) endearing Buffett and Bogle, it’s case for keeping a low overhead. Sophia Amoruso, Michael Ovitz, and the Wright brothers all kepted a low overhead in their businesses. Sarah Silverman, Jay Leno, and Jerry Seinfeld all kept a low overhead to kickstart their careers. The fewer obligations in one area, the more calculated risks you can take in another.

Thanks for reading, I’m @mikedariano on Twitter. If you want the audio version of these ideas, subscribe to my podcast; https://medium.com/mikes-mental-models .

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