Luck and risk are siblings, and they are both the reality that every outcome in life is guided by forces other than individual effort. NYU professor Scott Galloway has a related idea that it is so important to remember when judging success. Both your own and others. Nothing is as good or as bad as it seems. 

Bill Gates went to one of the only high schools in the world that had a computer. Bill was precocious and easily bored by his studies, so his parents took him out of public school and at the beginning of 7th grade, sent him to Lakeside. A private school located on the Seattle campus.

The story of how Lakeside school, just outside Seattle, even got a computer is remarkable. Bill Dougal was a World War Two Navy pilot, turning high school math and science future. He believed that book study wasn’t enough without real-world experience. He also realized that we need to know something about computers. Midway through Gates’s second year at Lakeside, the school started a computer club, thanks to Bill Dougal. 

The Mothers Club at school did a rummage sale every year, and there was always a question of what the money would go to. Gates remembers some went to the summer program, where inner-city kids would come up to the campus. Some of it would go to teachers that year. They put $3,000 into a computer terminal down in this funny little room that we subsequently took control of. A Teletype Model 30 computer hooked up to the General Electric mainframe terminal for computer timesharing.

 Most colleges didn’t have computer clubs in the 1960s when we got to college, recalled late Microsoft co-founder Paul Allen. 

Most university graduate schools did not have a computer anywhere near as advanced as Bill Gates had access to in 8th grade. And he couldn’t get enough of it. 

Gates was 13 years old in 1968 when he met his classmate, Paul Allen. Allen was also obsessed with the school’s computer, and the two hit it off.

Lakeside’s computer wasn’t part of its general curriculum, and it was an independent study program. Bill and Paul could toy away with the thing at their leisure, letting their creativity run wild after school late into the night. On weekends, they quickly became computing experts. 

During one of their late-night sessions, Allen recalled Gates showing him a fortune magazine and saying. What do you think it’s like to run a Fortune 500 company? Allen said he had no idea. Maybe we’ll have our own computer company someday, Gates said. Microsoft is now worth more than a trillion dollars. 

A little quick math. In 1968, there were roughly 303 million high school-aged people in the world, according to the UN. About 18 million of them lived in the United States. About 270,000 of them lived in Washington state. A little over 100,000 of them lived in the Seattle area. And only about 300 of them attended lakeside school. Start with 303 million. And with 300. One in a million high school age students attended the high school that had the combination of cash and foresight to buy a computer. Bill Gates happens to be one of them. 

Gates is not shy about what this meant. If there had been no lakeside, there would be no Microsoft; he told the school’s graduating class in 2005. Gates is staggeringly smart, even more hardworking. And as a teenager had a vision for computers to even the most seasoned computer executives couldn’t grasp. He also had a one in a million head start by going to school at Lakeside.

Bill Gates got to real-time programming as an eighth-grader in 1968. From that moment forward, Gates lived in the computer room. He and a number of others began to teach themselves how to use this strange new device. Buying time on the mainframe computer was expensive, even for a wealthy institution like Lakeside, and it wasn’t long before the $3000 put up by the Mothers Club ran out. 

Parents raised more money. Students spent it. Then, a group of programmers at the University of Washington formed an outfit called Computer Center Corporation, known as C-Cubed, which leased computer time to local companies. As luck would have it, one of the firm’s founders had a son at Lakeside, a class ahead of Gates with the Lakeside Computer Club. The Founder of C-cubed wondered if Bill and Paul like to test out the company software programs on the weekends in exchange for free programming time. Absolutely. 

After school, Gates took the bus to the C cubed offices and programmed long into the evening. C cubed eventually went bankrupt, so Gates and his friends began hanging around the computer centre at the University of Washington.

Before long, they latched onto another outfit called ISI, which agreed to let them have free computer time in exchange for working on a piece of software that could be used to automate company payrolls. 

In 1971, Gates and his cohorts ran up 15175 hours of computer time on the ISI mainframe in one seven month period, which averages out to 8 hours a day, seven days a week. It was my obsession, he says of his early high school years. I skipped athletics, and I went up there at night, we were programming on weekends. It would be a rare week that we wouldn’t get 20 or 30 hours in.

 There was a period when Paul Allen and I got in trouble for stealing a bunch of passwords and crashing the system. We got kicked out. I didn’t get to use the computer the whole summer. This is when I was 15 and 16. Then Paul had found a computer that was free at the University of Washington. 

They had these machines in the Medical Center and the Physics department. They were on a 24-hour schedule, but with this big slack. So that between three and six in the morning, they never scheduled anything, gates laughed. I’d leave at night after my bedtime. I could walk up to the University of Washington from my house, or I’d take the bus. That’s why I’m always so generous to the University of Washington because they let me steal so much computer time. 

Years later, Gates, his mother, said. We always wondered why it was so hard for him to get up in the morning. Pembroke, One of the founders of ISI, got a call from the technology company TRW, which had just signed a contract to set up a computer system at the huge Bonneville Power Station in Southern Washington state. 

TRW desperately needed programmers familiar with the particular software that power stations used in these early days of the computer revolution. Programmers with that kind of specialized experience were hard to find. Pembroke knew exactly who to call, those high school kids from Lakeside who had been running up thousands of hours of computer time on the ISI mainframe. 

Gates was now in his senior year, and somehow he managed to convince his teachers to let him decamp for Bonneville under the guise of an independent study project. There, he spent the spring writing code under the direction of a man named John Norton, who Gates says taught him as much about programming as almost anyone else had ever met. 

Those five years, from 8th grade to the end of high school, Bill Gates was presented with extraordinary series of opportunities. 

Opportunity number one was that Gates got sent to Lakeside. How many high schools in the world had access to a timesharing terminal in 1968?

 Opportunity number two was that the mothers of Lakeside had enough money to pay for the school’s computer fees. 

Number three was that when that money ran out, one of the parents happened to work at C cubed, which happened to need someone to check its code on the weekends, and which also happened not to care. If weekends turned into weeknights.

Number four was the gates just happened to find out about ISI and ISI just happened to need someone to work on its payroll software.

Number five was the Gate happened to live within walking distance of the University of Washington.

Number six was at the university. Happened to have free computer time between 3:00 and 6:00 in the morning. 

Number seven was a TRW that happened to call Pembroke 

Number Eight was the best programmers Pembroke Knew, for that particular problem happened to be two high school kids. 

Number nine was that Lakeside was willing to let those kids spend their spring term miles away writing code. 

And what did virtually all those opportunities have in common?

They gave Bill Gates extra time to practice. By the time Gates dropped out of Harvard after his sophomore year to try his hand at his own software company, he had been programming nonstop for seven consecutive years. He was way past 10,000 hours. That doesn’t mean he isn’t brilliant or an extraordinary entrepreneur. It just means that he understands what incredible good fortune it was to be at Lakeside in 1968.

Now let’s look at the story of Gate’s friend, Kent Evans. He experienced an equally powerful dose of luck’s close sibling risk. Bill Gates and Paul Allen became household names thanks to Microsoft’s success. But back at Lakeside, there was the third member of this gang of high school computer protégés.

Kent Evans and Bill Gates became best friends in 8th grade. By Gate’s own account, Evans was the best student in the class. The two talked on the phone ridiculous amounts, Gates recalls in the documentary Inside Bill’s brain. I still know Ken’s phone number, he says 5257851. 

Evans was as skilled with computers as Gates and Allen. Lakeside once struggled to manually put together the school’s class schedule, a maze of complexity to get hundreds of students to class as they needed at times that don’t conflict with other courses. The school passed Bill and Kent children, by any measure, to build a computer program to solve the problem. It worked. And unlike Paul Allen, Kent shared bills business mind and endless ambition.

Kent always had the big briefcase like a lawyer’s briefcase, Gates recalls. We were always scheming about what we’d be doing five or six years in the future. Should we go be CEOs? What kind of impact could you have? Shall we go be generals? Should we go be ambassadors? Whatever it was, Bill and Kent knew they’d do it together. After reminiscing on his friendship with Kent. Peach trails off. We would have kept working together. I’m sure we would have gone to college together. Kent could have been a founding partner of Microsoft with Gate and Allen. But it would never happen. 

Kent died of a mountaineering accident before he graduated high school. Every year there are around three dozen mountaineering deaths in the United States. The odds of being killed on a mountain in high school are roughly one in a million. Bill Gates experienced one in a million luck by ending up at Lakeside; Kent Evans experienced one in a million risk by never getting to finish what he and Gates set out to achieve, the same force of the same magnitude working in opposite directions. 

Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort. They are so similar that you can’t believe in one without equally respecting the other. They both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes, and they are driven by the same thing. 

You are one person in a game with 7 billion other people and infinite moving parts. The accidental impact of actions outside your control can be more consequential than those you consciously take. But both are so hard to measure and hard to accept that they too often go overlooked. 

For every Bill Gates, there was a Kent Evans who was just as skilled and driven but ended up on the other side of life roulette. If you give luck and risk their proper respect, you realize that when judging financial success, both your own and others, it’s never as good or as bad as it seems. 

Failure, which can be anything from bankruptcy to not meeting a personal goal, is equally abused. That failed business did not try hard enough. Were bad investments not thought through well enough.

 Our wayward careers due to laziness?

 Sometimes, yes, of course.

 But how much?

It’s so hard to know. Everything worth pursuing has less than 100% odds of succeeding, and risk is just what happens when you end up on the unfortunate side of that equation. 

Just as with luck, the story gets too hard, too messy, and too complex if we try to pick apart how much of an outcome was a conscious decision versus a risk.

Say you buy a stock, and five years later, it’s gone nowhere. It’s possible that you made a bad decision by buying it in the first place. 

It’s also possible that you made a good decision that had an 80% chance of making money. And you just happen to end up on the side of the unfortunate 20%. 

How do you know which is which? 

Did you make a mistake? 

Or did you just experience the reality of risk? 

It’s possible to statistically measure whether some decisions were wise. But in the real world, day-to-day, we simply don’t. It’s too hard. We prefer simple stories which are easy but often devilishly misleading. 

Someone else’s failure is usually attributed to bad decisions. 

While our own failures are usually chalked up to the dark side of risk, when judging my failures, I am likely to prefer a clean and straightforward story of cause and effect. 

You had a bad outcome, so it must have been caused by a bad decision. But when judging myself, I can make up a wild justification for my past decisions and attribute bad outcomes to risk. 

The cover of Forbes magazine does not celebrate poor investors who made good decisions but happened to experience the unfortunate side of risk. But it almost certainly celebrates rich investors who made OK or even reckless decisions and happen to get lucky. Both flipped the same coin that happened to land on a different side. The dangerous part is that we’re all trying to learn what works and what doesn’t with money. 

What investing strategies work?

 Which ones don’t?

What business strategies work? 

Which ones don’t?

 How do you get rich?

How do you avoid being poor?

We tend to seek out these lessons by observing successes and failures and saying, do what she did, avoid what he did. If we had a magic wand; we would find out exactly what proportion of these outcomes were caused by repeatable actions versus the role of random risk and luck that swayed those actions one way or the other. But we don’t have a magic wand. 

We have brains that prefer easy answers without much appetite for nuances. So identifying the traits we should emulate or avoid can be agonizingly hard. Let me tell you another story about someone who, like Bill Gates, was wildly successful. But whose success is hard to pin down as being caused by luck or skill.

Cornelius Vanderbilt had just finished a series of business deals to expand his railroad empire. One of his business advisers leaned in to tell Vanderbilt that every transaction he agreed to broke the law. My God, John, said, Vanderbilt. You don’t suppose you can run a railroad in accordance with the statutes of the state of New York, do you? 

Laws didn’t accommodate railroads during Vanderbilt’s day, so he said the hell with it and went ahead anyway. Vanderbilt was wildly successful, so it’s tempting to view his law flaunting, which was notorious and vital to his success as Sage Wisdom. That scrappy visionary let nothing get in his way. But how dangerous is that analysis? 

No sane person would recommend flagrant crime as an entrepreneurial trait. You can easily imagine Vanderbilt’s story turning out much different. 

An outlaw whose young company collapsed under court order. So we have a problem here. You can praise Vanderbilt for flaunting the law with as much passion as you criticize Enron for doing the same. Perhaps one got lucky by avoiding the arm of the law, while the other found itself on the other side of risk. 

John D Rockefeller is similar. With his frequent circumventing of the law, a judge once called his company no better than a common thief and is often portrayed by historians as cunning business smart. Maybe he was. But when does the narrative shift from you didn’t let outdated laws get in the way of innovation to you committed a crime, or how little would the story have to shift for the narrative to have turned from Rockefeller was a genius. 

Try to learn from his successes to Rockefeller was a criminal. Try to learn from his business failures. Very little. What do I care about the law in general once said, ain’t I got the power? He did, and it worked. But it’s easy to imagine those being the last words of a story with a very different outcome. 

The line between bold and reckless can be thin. 

When we don’t give risk and luck their proper billing, it’s often invisible.

Benjamin Graham is known as one of the greatest investors of all time. The father of value investing and the early mentor of Warren Buffett. But the majority of Benjamin Graham’s investing success was due to owning an enormous chunk of GEICO stock, which, by his own admission, broke nearly every diversification rule Graham himself laid out in his famous text.

 Where does the thin line between bold and reckless fall here? I don’t know, Graham wrote of his GEICO bonanza. 

One lucky break or one supremely shrewd decision. Can we tell them apart?

 Not easily. 

We similarly think Mark Zuckerberg is a genius for turning down Yahoo’s 2006 $1 billion offer to buy his company. He saw the future and stuck to his guns. But people criticize Yahoo with as much passion for turning down its own big buyout offer from Microsoft. Those fools should have cashed out while they could. 

What is the lesson for entrepreneurs here? 

There are so many examples of this; countless fortunes and failures owe their outcome to leveraging the best and worst managers to drive their employees as hard as they can. 

The customer is always right, and customers don’t know what they want are both accepted business wisdom.

Risk and luck are doppelgangers. The difficulty in identifying what is luck, what is skill, and what is risk is one of the biggest problems we face. But two things can point you in a better direction. 

Be careful who you praise and admire. Be careful who you look down upon and wish to avoid becoming. Or just be careful when assuming that 100% of outcomes can be attributed to effort and decisions. 

Some people are born into families that encourage education. Others are against it. Some are born into flourishing economies encouraging entrepreneurship. Others are born into war and deprivation. Not all success is due to hard work. And not all poverty is due to laziness. Therefore, focus less on specific individuals and case studies and more on broad patterns. 

Studying a specific person can be dangerous because we tend to study extreme examples. The billionaires, the CEOs, or the massive failures that dominate the news and extreme examples are often the least applicable to other situations, given their complexity. The more extreme the outcome, the less likely you can apply its lessons to your own life because the more likely the outcome was influenced by extreme ends of luck or risk. 

We can get closer to actionable takeaways by looking for broad patterns of success and failure. The more common the pattern, the more applicable it might be to your life. Trying to emulate Warren Buffett’s investment success is hard because his results are so extreme that the role of luck in his lifetime performance is very likely high.

Luck isn’t something you can reliably emulate. But realizing that people who have control over their time tend to be happier in life is a broadened common enough observation that you can do something with it. 

Historian, Frederick Lewis Allen, spent his career depicting the life of the average median American, how they lived, how they changed, what they did for work, what they ate for dinner, etc. There are more relevant lessons to take away from this kind of broad observation than in studying the extreme characters who tend to dominate the news.

Bill Gates once said success is a lousy teacher. It seduces smart people into thinking they can’t lose when things are going extremely well. Realize it’s not as good as you think. You are not invincible, and if you acknowledge that luck brought you success, then you have to believe in luck’s cousin risk, which can turn your story around just as quickly. But the same is true in the other direction. 

Failure can be a lousy teacher because it seduces smart people into thinking their decisions were terrible when sometimes they just reflect the unforgiving realities of risk. The trick when dealing with failure is arranging your financial life in a way that a bad investment here and a missed financial goal there won’t wipe you out, so you can keep playing until the odds fall in your favour. But more important is that as much as we recognize the role of luck and success. 

The role of risk means we should forgive ourselves and leave room for understanding when judging failures. Nothing is as good or as bad as it seems.

Credit: Outlier by Malcolm Gladwell, Psychology of Money Morgan Housel

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Categories: All Stories

Tags: Behavioural finance, investment mentality, Mindset, Money, personal habit, personal habits