Failed Restaurants

Jay Clayton is the chairman of the United States Securities and Exchange Commission.
And today, The Wall Street Journal reports in an interview that “Clayton, a Trump appointee wrestling with how to boost flagging interest in public markets, said the commission also wants to take steps to give more individual investors a shot at companies that have been out of their reach because they haven’t gone public”:
Now, no president or government is ever unilaterally responsible for a stock market doing well… or even doing badly.
Okay, I see you, Venezuela.
But that’s a whole other non-democratic story gone terribly bad.
Many folks worry that the risk of letting investors into the private market may outweigh the reward.
All right, on the one hand, if you understand and are enthusiastic about one company, maybe you can part with cash and think long-term for your return to make the holding period worthwhile.
Logging onto the Equidate website, here are some names that pop up on the homepage that you’ll recognize:
- 23andMe
- Airbnb
- Postmates
- Slack
- SpaceX
- Uber
- WeWork
- and many more
You may know that these companies are worth over a billion dollars.
Some of you may know that a few are worth in the tens of billions of dollars.
But none of us, including myself, know when these companies will go public, if ever.
Further, the timetable also involves having to hold onto your shares even after an IPO for at least a few months:
Everyone who is an investor or wants to be one aims to be on the ground floor of the next big idea.
For every Google that popped up two decades ago, there are dozens of search engines that died after only a few years.
If you focus on the one lone survivor as evidence to call a home run shot à la Babe Ruth, then that’s survivorship bias:
“Simply put, survivorship bias is your tendency to focus on survivors instead of whatever you would call a non-survivor depending on the situation. Sometimes that means you tend to focus on the living instead of the dead, or on winners instead of losers, or on successes instead of failures. In Wald’s problem, the military focused on the planes that made it home and almost made a terrible decision because they ignored the ones that got shot down.
It is easy to do. After any process that leaves behind survivors, the non-survivors are often destroyed or muted or removed from your view. If failures become invisible, then naturally you will pay more attention to successes. Not only do you fail to recognize that what is missing might have held important information, you fail to recognize that there is missing information at all.
You must remind yourself that when you start to pick apart winners and losers, successes and failures, the living and dead, that by paying attention to one side of that equation you are always neglecting the other. If you are thinking about opening a restaurant because there are so many successful restaurants in your hometown, you are ignoring the fact that only successful restaurants survive to become examples. Maybe, on average, 90% of the restaurants in your city fail in the first year. You can’t see all those failures because when they fail they also disappear from view. As Nassim Taleb writes in his book The Black Swan, ‘The cemetery of failed restaurants is very silent.’ Of course, the few that don’t fail in that deadly of an environment are wildly successful because only the very best and the very lucky can survive. All you are left with are super successes, and looking at them day after day you might think it’s a great business to get into when you are actually seeing evidence that you should avoid it.”
Maybe lowering the net worth hurdle to becoming a private investor isn’t such a bad idea.
But lowering the financial education hurdle to becoming a private investor is a very bad idea with potentially irreversible repercussions on one’s lifetime savings.
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