Hey everyone, Subhan Gerard here. Today I'm going to share some wisdom from Peter Thiel’s book, Zero to One, and I'm going to keep it simple.
Think about your life for a second. There's a lot happening around you, a lot of different things going on. A lot of people working hard. But when you zoom out, you’ll notice that a few things are responsible for most of what happens, and a few people are responsible for most of what we know. That's the power law, also known as the Pareto principle, or the 80/20 rule.
We often want to think that all the events and outcomes in our lives are somewhat equally distributed and predictable. We think all the work we’ve put in, and the effort we’ve exerted, is the only reason for what we’ve accomplished.
We don’t readily see the power law because most of us are always operating in the 80% of the world that’s “average,” and we often fail to recognize those outliers that make all the difference. The 20% of things that are exceptional are the things that really matter. That’s the 20% that drives progress, that changes the way the world works, that makes a difference. But most of us are so focused on our own lives, or our own work, that it’s easy to just assume that everything around us is roughly the same—that it's all just about effort and doing things the right way.
Take Warren Buffett. He’s one of the richest investors in the world, and everyone’s heard his name. He’s famous for his investing skills, but the book points out that most of Warren Buffet's success comes from the fact that he’s been investing consistently from a young age. Imagine that Warren had only started investing after he turned 30. Then he retired when he was 60 and played golf. How much would he be worth today? Not $84.5 billion. Less than 1% of that, or just $11.9 million.
Or take venture capital. It’s an industry that’s specifically built around seeking out the outliers, the 20% of companies that can become massively valuable. The book shows that it's not uncommon for the most successful investment in a venture capital fund to account for more than the entire rest of the fund combined.
It’s easy to imagine that these cases are exceptions. But it’s not. Venture capital is just one example of how the power law shows up in business. We see it everywhere: In Hollywood, one film like "Avatar" can generate more revenue than all the other films released in the same year. In the music industry, artists like Adele and Taylor Swift, can sell hundreds of millions of albums while most musicians struggle to sell a few thousand. The same goes for everything—from sports to technology to even your own social circles. A handful of people, places, and things, disproportionately influence our lives.
What does all this mean for us as investors? It means that the conventional investing wisdom—that you should diversify your investments to spread out your risk—is not necessarily a good thing to do. Diversification makes sense if you’re playing the odds and assume that outcomes will be spread evenly—the idea that if one investment fails, another will make up for it. But if you are an investor, you are not playing the odds—you are seeking out the 20% of investments that can radically outperform the rest. You are not seeking to “average” your returns, you are looking for those investments that can make a huge difference in your financial future.
It also means that you can’t rely on “experts” to tell you how to find those investments. If everyone were smart and able to find these outliers, they would quickly become common, and their value would be competed away. This is a good thing for the world as a whole. As a result of this competition, there are few, if any, easy opportunities left. To find these investments, you need to be more than smart: you need to be different. You need to think for yourself. And you need to be willing to bet big, in a few places, and see where it takes you. That means you will need to take on more risk than you are probably comfortable with—and it also means that you’ll probably make a lot of mistakes. But remember, mistakes are not failures; they are learning experiences. They’re how we improve, and how we find the rare, truly valuable, exceptional investment.
It’s tempting to say “the power law makes the market too unpredictable. It means there’s no way to win.” And that could be true—especially if you think the world is random and that you should play it safe. But the power law is not a sign of chaos or defeat. It is, in fact, the opposite: It is a sign of opportunity. If you understand that a few things really do control most outcomes, you can take advantage of those outliers.
This doesn’t mean that you should never diversify. It does mean that you should think differently. You should think more carefully about where your actions and investments fall on the power law curve. Look at your life. What is the 20% that matters? What is the 20% you could control?
Think about your friends. Think about your job. Think about your business. Think about the world. It’s there, everywhere.
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