Sep 21, 2024
On the surface, it might not seem like a rap star from Brooklyn, born in 1969, would have much in common with a professional investor from Omaha, born in 1930. Yet, Shawn Carter, better known as Jay Z, and Warren Buffett share a surprising number of similarities.
They’re both billionaires, for instance, and have a broad portfolio of business ventures ranging from candy stores to expensive champagne. Another commonality is that both men attribute part of their success to luck.
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In a joint interview with Steve Forbes, founder of Forbes Magazine, in 2010, Buffett said he was extremely lucky to be born in America just as the nation’s economy was accelerating and that he was “wired for capital allocation.” Meanwhile, Carter pointed out that growing up in a rough neighborhood put the odds against him.
“There are very few people from my neighborhood, in my environment that make it out,” he told Forbes. “I mean, forget about being successful. To make it out alive or not be incarcerated.”
This recognition of luck and happenstance isn’t just humility, it’s also a key part of the calculation that many successful investors like Carter and Buffett weigh before deploying money.
Probabilistic thinking
Investors often have to deal with a lack of clear information when making decisions about where to allocate capital. To manage that uncertainty, professional investors apply probabilistic thinking or Bayes’s Theorem. The theorem, developed by English statistician Thomas Bayes in the 18th century, suggests that people should take new information into context of existing information when making decisions.
For instance, if you see a headline that suggests “Shark Attacks are Up 300%,” you might assume that your chances of being attacked by a shark have risen significantly. However, when you take this new data in context of existing data from the Florida Museum of Natural History that suggests an individual’s chances of being attacked by a shark is just 1-in-4.3 million, you realize that a 300% spike isn’t as much of a threat to you.
Similarly, professional investors think of their chances of losing money in probabilistic terms. Just like Carter analyzed the risk of getting out of a tough neighborhood and Buffett acknowledged the opportunities he was afforded (especially compared to his sisters, who he says were equally smart), investors should pay attention to statistics.
For instance, data from Wealthfront suggests that the chances of losing money in the stock market can be reduced from 25.2% to 0% by extending your holding time from one year to 20 years. Based on this data, it’s probably better for an investor to hold a stock or fund for as long as possible.
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This mental framework could help investors make critical decisions. However, there are ways to shift the odds in your favor.
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Taking control
While thinking probabilistically, you may realize that many factors are beyond your control. For instance, you can’t control the number of shark attacks every year, or the volatility of the stock market.
However, some factors can be controlled. For instance, Carter frequently mentioned his champagne brand, Armand de Brignac, by the nickname “Ace of Spades” in his songs. This ensured that when his tracks were hits, sales of the bubbly would follow. He eventually struck a deal with luxury giant LVMH to secure distribution and unlock value in this venture.
Meanwhile, Buffett has often mentioned how extensive his due diligence process is and how he reads “500 pages a day” to make better stock-picking decisions.
Both men recognize that luck and probability can only get you so far. Talent and effort can push the odds in your favor.
For regular investors, the lesson is clear: do your research and account for all the variables while investing.
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Vishesh Raisinghani is a financial journalist covering personal finance, investing and the global economy. He's also the founder of Sharpe Ascension Inc., a content marketing agency focused on investment firms. His work has appeared in Moneywise, Yahoo Finance!, Motley Fool, Seeking Alpha, Mergers & Acquisitions Magazine and Piggybank.
