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The Intelligent Investor
Jason Zweig
[https://www.wsj.com/finance/investing/why-investors-fall-for-shooting-stars-b116f862?mod=djemintinvestor](https://www.wsj.com/finance/investing/why-investors-fall-for-shooting-stars-b116f862?mod=djemintinvestor)
Why Investors Fall for Shooting Stars
My colleague Spencer Jakab wrote last week about why investors seem to forgive fallen investing stars. A question that intrigues me is why investors fall for these shooting stars in the first place.
* Leopold Aschenbrenner’s hedge fund Situational Awareness was up 270% this year through May and had amassed $45 billion at its peak.
* Cathie Wood’s ARK Innovation ETF skyrocketed 153% in 2020, helping to attract $20 billion in new money to her firm by year end.
* At the end of 1999, then 29-year-old Ryan Jacob launched the Jacob Internet Fund. Lured by the 216% annual return at his previous fund, investors showered nearly $300 million at him in the opening weeks of 2000.
Big numbers! But, as Benjamin Graham warned in his classic book The Intelligent Investor:
Bright, energetic people—usually quite young—have promised to perform miracles with “other people’s money” since time immemorial. They have usually been able to do it for a while—or at least to appear to have done it—and they have inevitably brought losses to their public in the end.
And so it goes. Aschenbrenner’s fund lost 67% in July. ARK Innovation has trailed the S&P 500 by an average of nearly 23 percentage points annually since the end of 2020. Jacob Internet lost 70% in 2000 and 56% in 2001—and, since its launch, has lagged behind the S&P 500 by nearly 14 percentage points annualized.
**Why do investors never seem to learn?**
Like all humans, investors indulge in magical thinking. As the psychologist Daniel Kahneman told me years ago, “Luck and randomness are the likeliest—but least satisfying—explanations for extreme outcomes. Ordinary causes feel insufficient to explain extraordinary results.”
And the more surprising a result is, the more it cries out for an emotionally convincing explanation. As Kahneman loved to say, “Stories trump statistics.” If something seems miraculous—like doubling or tripling other people’s money in a few months—our intuition tells us the person who did it must be a miracle worker.
**Will that ever change?**
I recently was walking along 41st Street near the New York Public Library in Manhattan, where the sidewalks are inset with bronze plaques highlighting the power of words. I quickly found my favorite:
>A bronze plaque embedded in the ground, featuring a quote from Willa Cather, "there are only two or three human stories, and they go on repeating themselves as fiercely as if they had never happened before..."
Wise words from Willa Cather.
Among investors, one of those perennial stories is the young swashbuckling genius who comes out of nowhere, racks up gigantic gains on risky bets, attracts massive amounts of money, then crashes and burns.
That story goes on repeating itself as fiercely as if it had never happened before, and I suspect it always will.