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Thiel update

A year or so ago I discussed the reasoning of zillionaire financier Peter Thiel, who seems to believe his own hype and, worse, seems to be able to convince reporters of his infallibility as well. Apparently he “possesses a preternatural ability to spot patterns that others miss.”

More recently, Felix Salmon commented on Thiel’s financial misadventures:

Peter Thiel’s hedge fund, Clarium Capital, ain’t doing so well. Its assets under management are down 90% from their peak, and total returns from the high point are -65%. Thiel is smart, successful, rich, well-connected, and on top of all that his calls have actually been right . . . None of that, clearly, was enough for Clarium to make money on its trades: the fund was undone by volatility and weakness in risk management.

There are a few lessons to learn here.

Firstly, just because someone is a Silicon Valley gazillionaire, or any kind of successful entrepreneur for that matter, doesn’t mean they should be trusted with other people’s money.

Secondly, being smart is a great way of getting in to a lot of trouble as an investor. In order to make money in the markets, you need a weird combination of arrogance and insecurity. Arrogance on its own is fatal, but it’s also endemic to people in Silicon Valley who are convinced that they’re rich because they’re smart, and that since they’re still smart, they can and will therefore get richer still. . . .

Just to be clear, I’m not saying that Thiel losing money is evidence that he’s some sort of dummy. (Recall my own unsuccess as an investor.) What I am saying is, don’t believe the hype.

12 Comments

  1. Pirate Rogue says:

    Well, if you're going to criticize the man, you might begin by learning to spell his name correctly. It's Thiel, not Theil.

    I guess numbers are your thing. Not letters.

  2. Andrew Gelman says:

    Typo fixed; thanks.

  3. K? O'Rourke says:

    Success, and re-enforcement for success inevitably leads to failure.

    Or at least that was Peirce’s argument. Those whose nature are suited to the time do well (better than average) and then when the times change they persist in their old ways (as they have repeatedly and especially intermittently been re-enforced for) and fail big.

    K?

  4. I really hate that someone as smart as Thiel identifies as an ideological libertarian rather than as a technocrat more in the Bloomberg mold.

    Thus it gives me a thrill that the market might be punishing a kind of mental rigidity -but I have no idea if that's true.

    I didn't really know who Felix Salmon is. I was about to blast him in the comment on his own arrogance for claiming to offer critical insight on Thiel when Salmon is not as successful an investor, BUT my own insecurity caused me to look up Salmon first to make sure he wasn't some genius investor I hadn't heard of. He's not a genius investor, but he does have an interesting biography, and it seems to me like he's probably one of the most statistically literate journalists out there.

    http://en.wikipedia.org/wiki/Felix_Salmon

  5. bxg says:

    Hopefully anonymous:

    FYI Salmon is a "top-10", and probably near the top even of that short list, among worldwide most read/influential financial bloggers. Whatever you think about him, he's not another random-voice on the Inter-tubes :-)

    But the real gist of your message seems to be your faith that the "genius" of investor will show up in financial "sucesss". I assume if genius plays a role, you mean success beyond that which mere chance, a propensity to take extreme bets, survivorship bias, and government handouts based on bribery, don't explain completely. The evidence seems to point well against this. Take out Buffet, and I'd love to see any serious study that was even consistent – let alone in the slightest bit confirmatory – with your belief!

  6. Mark Palko says:

    The list is vanishingly small, but I'd add few names to Buffet's, such as Peter Lynch and (though I'd need to do more research to be sure) Keynes.

  7. Vic says:

    Buffett would have been bankrupt if not for the fed bailouts, homespun wisdom or not. And Theil is hardly a genius, and comes off as quite the moron in the previous post Andrew linked to.

  8. The investing world seems to me to be a bit chaotic, and identifying the best investor may be something like identifying the best infantryman on the beaches of Normandy.

    Giving greater weight to the market models of successful investors over respected/influential financial journalists may be a bad heuristic on my part.

    It's a problem of rival classes of experts, when they disagree.

  9. Mark Palko says:

    A new book on Paul Samuelson discusses the those very rare cases of investors who consistently beat the market, one of whom seems to be Samuelson himself.

  10. K? O'Rourke says:

    Mark: Challenge with Keynes is to rule out his influence after his purchases.

    Or as the story goes, he would advise his (often well connected wealthy)graduates students of his best market bets after he had made the same purchases himself (this is from memory and may not be known to be true).

    K?
    p.s. Keynes was a brilliant statistician before going into economics

  11. Mark Palko says:

    I think the record for this sort of thing goes to Ricardo in a scene that played out a bit like the climax of Trading Places (from Warsh's article — linked above):

    A favorite story, late in life, had to do with the huge profits David Ricardo reaped after the Battle of Waterloo, the details adduced by Ricardo’s biographer, Piero Sraffa. The bond trader had an observer stationed near the battle. Once the outcome was clear, he galloped quickly to where a packet ship was waiting. So Ricardo in London received the early news, and conveyed it to the British government.

    Then he went down to his customary chair at the Exchange – and sold! Other traders, suspecting the worst, sold too, the prices of Treasuries tumbling, until at last, Ricardo reversed course and bought and bought and made a killing, his greatest coup ever, one that put even the Rothschild brothers in the shade.

    “If not illegal, an ethical purist would have to fault Ricardo for in effect profiting from his own spreading false rumors,” Samuelson wrote. “In this millennium that might be something to criticize or even to litigate.” Even so, the ploy was not unheard of in the present day, he would confide, given that new news, not yet digested, was what sent markets spinning.