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TIP654: Investing Across the Life Cycle w/ Aswath Damodaran
We Study Billionaires - The Investor’s Podcast Network
Navigating the Perils of Survivorship Bias in Investing
Survivorship bias significantly distorts the understanding of a company's historical performance. Many investors are lured by the allure of extraordinary returns exemplified by companies that have dramatically increased in value, such as those identified by Chris Mayer. However, studying these success stories can lead to misleading lessons; namely, the belief that replicating past successes is achievable. The focus should not be on searching for the next '100 bagger', as this mindset often results in over-concentration and misguided investments, ultimately jeopardizing wealth preservation and growth. The reality is that only a small fraction of stocks drive the majority of market returns. Historical analysis shows that missing out on the top-performing stocks can yield inferior returns compared to safer assets like T-bills. Therefore, investors should aim to identify reliable winners and hold them long-term rather than chasing elusive, mega-successes. Emphasizing diversification—owning a broader range of strong companies—reduces the risk of significant losses and positions the investor to gain from a few exceptional performers over time. In essence, a prudent investment strategy should prioritize maintaining portfolio health, avoiding speculative extremes, and fostering a long-term perspective.
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