Fooled By Randomness
Click here to buy the book.🚀 The Book in 3 Sentences
Fooled By Randomness explores the roles of luck, uncertainty, risk, and human error in a world that's more unpredictable than we realize.
The book focuses on luck—specifically, how we understand and handle it in both life and business.
The book dives deep into thought-provoking questions like: Can we tell the difference between a lucky fraud and a true visionary? Do we always need to find meaning in random events?
🧠 Key Takeaways
While a dollar in dividends is the same as a dollar in share price gains, share prices are undeniably driven far more by randomness (specifically, random human behavior), especially in the short term.
So much of the market is driven by randomness—especially in the short term—that you can’t judge the quality of a decision solely based on the outcome. The process that led to the decision is more important.
Too much of a focus on outcomes can make us forget about the "losers"—those who took similar risks but failed—who likely outnumber the winners. As a result, we develop a false sense of reality that makes us think success is more common or easier to achieve than it really is.
Some of the signals the market sends us can be misleading. Share price performance and dividend yields, in particular, can show us the opposite of their true nature.
There’s something shortsighted and immature about finding self-worth in material possessions. It’s a shallow way to live, and it ignores how unsustainable that lifestyle can be.
Hearing stories of the winning stocks, and those who got in on them early, inspires hope that it could happen to you, too. So, you pile into today’s winners, further fueling their momentum while pushing the other, losing candidates even further into obscurity.
✍️ Memorable Quotes
“Solon was wise enough to get the following point; that which came with the help of luck could be taken away by luck (and often rapidly and unexpectedly at that). The flipside, which deserves to be considered as well (in fact it is even more of our concern), is that things that come with little help from luck are more resistant to randomness.”
Upon reading this, my mind immediately goes to the difference between share price returns and dividend income.
While a dollar in one is the same as a dollar in the other, share price returns are undeniably driven far more by randomness (specifically, random human behavior), especially in the short term.
On the other hand, dividend income exists and persists only because of the consistently strong operational performance of the business, making it far less random.
A dividend policy is put in place, and if you’re investing in the right kinds of companies, that dividend tends to grow over time as the business becomes larger and more successful.
Because of this, while dividends are not guaranteed (as the anti-dividend crowd loves to remind us), they are much more resistant to randomness than share prices.
And all of this happens independently of what the share price is doing. Share prices can move in any direction, often for reasons entirely unrelated to the actual operational results of the business.
“Clearly, the quality of a decision cannot be solely judged based on its outcome, but such a point seems to be voiced only by people who fail (those who succeed attribute their success to the quality of their decision).”
This echoes the main premise of the book Thinking in Bets by Annie Duke.
In essence, when it comes to decision-making, there’s the process of arriving at the decision and the outcome of the decision, and there isn’t always a direct causation between the two—especially in the stock market.
You can blindly buy a stock without doing any research and see it shoot up 100%, while at the same time, you can spend hours doing due diligence into a company, only to see its share price head south and never recover.
So much of the market is driven by randomness—especially in the short term—that you can’t judge the quality of a decision solely based on the outcome, as the quote says. The process that led to the decision is more important.
If you adhered to a disciplined process and the outcome was poor, you shouldn’t beat yourself up over it. You controlled the controllable; randomness just wasn’t on your side this time.
On the other hand, a positive outcome achieved through luck shouldn’t be mistaken for skill (even though it often is), as relying on luck is not a repeatable long-term strategy.
The key is to focus your energy on refining your investment process over time. If you are consistently on the receiving end of poor outcomes because you don’t follow a disciplined approach, it’s worth getting that dialed in.
“We see the wealth being generated, never the processor, a matter that makes people lose sight of their risks, and never consider the losers. The game seems terribly easy and we play along carelessly. Even scientists with all their sophistication in calculating probabilities cannot deliver any meaningful answer about the odds, since knowledge of these depends on our witnessing the barrel of reality—of which we generally know nothing.”
People tend to fixate on visible outcomes—like wealth or success—without thinking about the hidden risks, uncertainties, and randomness that led to them.
This focus on outcomes can make us forget about the "losers"—those who took similar risks but failed—who likely outnumber the winners. As a result, we develop a false sense of reality that makes us think success is more common or easier to achieve than it really is.
Still, you only ever hear about the success stories because they’re inspiring and memorable. You only see the winners, and the losers fade into obscurity, creating a sense of overconfidence that makes “the game” seem far easier to win than it actually is.
With that said, acknowledging the role of luck and randomness doesn’t mean success is out of reach—it’s just harder and more uncertain than we’d like to admit.
“Sometimes market data becomes a simple trap; it shows you the opposite of its nature, simply to get you to invest in the security or mismanage your risks.”
Some of the signals the market sends us can be misleading. Share price performance and dividend yields, in particular, can show us the opposite of their true nature.
Regarding share price performance, at first glance, a drop might seem like an obvious sign that something bad has happened to the company. And sometimes that’s true—specific company news can certainly send a stock heading south (as it should).
But oftentimes, swings in share prices can come as a result of things that have little to do with the company itself. Interest rate announcements, CPI reports, geopolitical events—these external forces can shift the market, and the price of any individual company, in a big way.
The same is true for rising share prices. Positive momentum often has more to do with how investors feel about a stock (or how they believe others feel) than with the company’s fundamentals—especially in the short term.
This is what Ben Graham meant when he said that the market is a “voting machine” in the short term and a “weighing machine” in the long term.
As a certain stock gains momentum, more people start to pile in. In doing so, they mistake the movement as a signal that the company is a good investment.
Nonetheless, this behavior creates a vicious cycle, which pushes the share price higher and higher until it reaches a point where the euphoria can no longer be sustained.
Entire trading strategies are built around this momentum, and it’s easy to see why. With this type of approach, the focus isn’t on intrinsic value or long-term prospects but on putting money into stocks whose demand is on the rise.
When demand goes up, so does the price, and traders aim to profit from that. This type of strategy can work in the short term because it plays into the same emotional impulses that drive the market.
But here’s the problem for the unknowing investor: what looks like a clear signal is often just noise. This principle applies to dividend yields as well, especially in the case of covered call ETFs.
These funds are marketed with attractive attributes like high yields and frequent payouts. As an example, look no further than something like QDTE and the other weekly-paying ETFs, which are all the rage right now.
At first glance, these type of funds might seem like a dream come true for income-seeking investors. But those high yields and frequent payouts aren’t designed to help you—they’re designed to sell the product.
The real winners here are the fund managers that collect the fees, and it’s easy for an unsuspecting investor to be drawn in.
A 34% yield, paid out every single week? It might sound like a shortcut to financial freedom, but it’s a trap.
These investment products are often unsustainable, and many of them disappear just as quickly as they arrived. Unfortunately, when one fades away, another will be there to take its place, designed to be just as enticing—and just as misleading—to the next group of unsuspecting investors.
“There is something nonphilosophical about investing one’s pride and ego into a ‘my house/library/car is bigger than that of others in my category’—it is downright foolish to claim to be first in one’s category all the while sitting on a time bomb.”
We call this “peacocking.” Basically, it’s when someone uses flashy, material displays or signals to attract attention or show off their worth to others.
I actually saw a perfect example of this at the airport yesterday. While going through security, the two guys in front of me were completely decked out in designer. Luxury leather duffel bags, Burberry sweats, Gucci t-shirts, fresh Jordan 1s—you name it.
From head to toe, they were dripping in luxury. And me, being the finance weirdo that I am, my first thought was: “I bet they don’t have a single penny set aside for their future.”
Now, I could’ve been wrong. Maybe they’re very wealthy. But in my experience, people who actually have real wealth—or understand what it takes to build it—don’t feel the need to go out of their way to flaunt it.
What I saw in these two guys wasn’t wealth; it was the illusion of wealth.
They wanted others (especially the ladies) to believe they had money. But if I had to guess, their savings are probably minimal, and their investment portfolios are nonexistent.
Now don’t get me wrong—I understand the want to have nice things, and I have no issues with a healthy amount of retail therapy (if you can afford it).
But I know reckless spending when I see it, and buying nice things that you can’t actually afford is kind of like building your diet entirely around dessert. It’s fun and tastes good in the moment, but eventually, it’s going to catch up to you.
And like the quote says, there’s something shortsighted—and, in my opinion, immature—about finding self-worth in material possessions. It’s a shallow way to live, and it ignores how unsustainable that lifestyle can be.
“There are other aspects to the monkey problem; in real life the other monkeys are not countable, let alone visible. They are hidden away, as one sees only the winners—it is natural for those who failed to vanish completely. Accordingly, one sees the survivors, and only the survivors, which imparts such a mistaken perception of the odds.”
When I read this quote, my mind immediately jumps to the hot stocks of the moment—companies like SOFI and PLTR.
These two stocks have seen explosive gains—120% and 337% over the past year, respectively. When you see such meteoric rises, it’s easy to play the hindsight game and tell yourself that buying them was a no-brainer.
Maybe you should have bought them. Maybe you should have bought more. But was it really that obvious at the time?
For some reason, these stocks have become the “it” stocks of the moment, selected from hundreds of other potential candidates. With that, it’s easy to forget that for every SOFI or PLTR, there are countless others that fade into the background, permanently lost to obscurity, taking with them the money of anyone who bet on them.
It’s a lot like playing roulette. If the ball lands on number 5, you’ll undoubtedly regret not betting on that number. But that regret makes it easy to forget there were 31 other numbers it was just as likely to land on, including 0 and 00.
And for the person who did pick number 5—was it skill that allowed them to win? Did they somehow know it was going to hit, or were they just lucky?
Maybe they’ve been standing at the roulette table for hours, betting on 5 every single spin, until they finally won through sheer persistence.
The same logic can apply to stocks like SOFI and PLTR. Are their skyrocketing share prices a reflection of the businesses being THAT good? Or did chance pick them out of the bunch, aided by the loud and persistent advocates of the companies?
Realistically, the truth is probably somewhere in the middle. That’s usually how it goes.
The point, though, is that it’s easy to look at today’s winners and convince yourself they were destined for greatness. But not long ago, these same stocks were buried in the background—indistinguishable from countless others that didn’t catch the same lucky break.
We hear most about the winners because nobody wants to buy a losing stock. Everyone dreams of hitting it big, and so the stocks delivering that get all the attention while the losers fade away.
Hearing stories of the winners, and those who got in on them early, inspires hope that it could happen to you, too. So, you pile into today’s winners, further fueling their momentum while pushing the other candidates even further into obscurity.
Having said all of that, next time you see a stock skyrocketing, it’s best not to assume that its rise was inevitable. Instead, remember the forgotten crowd of losers, and ask yourself: is this stock actually a sound investment, or just another spin of the roulette wheel?
Dear Shareholder is a curated collection of the most insightful passages from some of the greatest shareholder letters ever written.