WINNER TAKES ALL.
I was just replaying the 2003 Cricket World cup final match between India and Australia, when an idea stuck me. Its not a NEW idea, there never is but a new way of looking at the same old thing.
There was a reason why we got decimated that day. And the reason was simple. The FINALS was an overwhelming occasion for us, a BIG DEAL, we reached their after ages and ages of wait.
For Australia, it was a run of the mill, yet another final, just another final. I am not saying it was not a big deal for them or they do not treasure being in the final, what I am getting at is that they had been there enough times.
This small difference is what i intend to talk about and of course I am going to link it with stocks and investing.
Technically when a breakout happens for the first time, it generally does not sustain and a lot of selling pressure puts it back in its place. That failed breakout is a functional equivalent of India in 2003 finals. It gets overwhelmed by the occasion, since it has never been there, it gets nervous and fails to channelize that gush of nervous energy.
But once it makes a habit of reaching that PIVOT, from there on its just a matter of time when it breaks it convincingly never to go back again.
Let me give you an analogy to bring home the point. Recall your first day in a new job. You don’t know anything or anyone. You spend the entire day figuring out stuff. where are the exits, how does the bio metric system works, the restrooms, who is the loud mouth, who r the patsies, where does that hottie sit. Who are your kind of people etc etc.
Compare that with NOW. You don’t even know how you went two floors up, grabbed your fax, came back walked down the aisle, picked your Starbucks coffee and back at your system opening LEGACY and punched 08 commands without ever instructing your mind to do it EVEN once.
All that happened on auto pilot. That is what they mean when they say “WINNING IS A HABIT” and chains of habit are easy to form and almost impossible to break.
Now, It gets interesting,. Its not that winning is a habit and that is it, the thing about winning is that in some cases loser is left with nothing and winner takes all. It becomes a positive feedback loop. According to Wikipedia, ‘Positive feedback is a process that occurs in a feedback loop in which the effects of a small disturbance on a system include an increase in the magnitude of the perturbation
In simple language a situation where condition A produces more of condition B which in turn produces more of condition A and the loop continues till Euphoria.
It becomes a SELF FULFILLING PROPHECY. Because Australia has played more finals, it has better odds of winning that final. Because Australia wins the finals, no. Of finals they play increases compared to others.
We saw that play out in 2014 finals as well. New Zealand were totally overwhelmed by the occasion especially after mccullam left early.
Going by the same hypothesis, the % chances of New Zealand lifting the world cup has increased many folds in the future, now that they have started knocking on the heavens door.
Another example. When Television came, the change in technology was overwhelming. Radio became outdated overnight. The medium for communication was TV. Only rich companies could afford to advertise on TV, Only those companies entered the mind of people whose advertisement they had seen on TV and hence only their products were sold.
Marginalized Competitor got wiped out. Coz they were small, they could not afford TV ads, their sales never picked up. Rich companies became MOATS, while poor companies filed for bankruptcy.
WINNER TAKES ALL. This is what multi year uni directional trends are made of, what Charlie Munger calls as RIDING THE WAVE.
Sure all analyses is marred by hindsight bias when you do a postmortem of a given situation that has already happened.
To counter this flaw one needs to not only back-test a hypothesis but also forward test it. Try and run this mental model in your mind and see which all companies are enjoying this positive feedback loop and more importantly which ones are at the receiving end of it.