This month: Why 80% so easily gets treated as destiny. How companies evolve to fit the filters that shape capital — often resembling value more than creating it. And from the field, a line on results that reframes the difference between building value and earning credibility.
When 80% Feels Like 100%
In life, an 80% probability sounds like a sure thing. Who wouldn’t like those odds?
Until you change the stakes.
If I load a bullet into a five-chamber gun, spin it, and pull the trigger, you have an 80% chance of walking away. Suddenly, 80% feels much less comfortable.
Markets, and frankly, our daily lives, are full of 80% chances. They just don’t present themselves that way.
We like to think of forecasting as something analysts do with spreadsheets. In reality, it is what you do every time you cross the street.
Every decision contains three components, whether we acknowledge them or not:
A set of possible outcomes.
A payoff attached to each outcome.
A belief about how likely each outcome is.
That structure has a name. In finance, we call that expected value.
We perform this calculation constantly. Should I cross this street? Should I take this job? Should I launch this product? Should I buy the dip?
The inputs are rarely precise, but the structure is always there.
Markets do not create probabilistic thinking. They reveal how poorly calibrated human judgment often is.
Behind every forecast we encounter is a range of outcomes with probabilities attached. The problem for investors is that markets do not trade in ranges. They trade in narratives.
“We’re confident.” “We are well-positioned.” “Momentum remains strong.” “We expect to double sales next year.” None of these are declarations of certainty. They are probability estimates delivered in rhetoric.
But investors often hear inevitability and discount the downside.
The mistake is rarely in the data itself. Data is just a description. The error usually comes when we attach an explanation to it. A stock rallies 25%, and we call it validation. A sector falls 15%, and we call it contagion. A company posts five strong quarters, and we call it structural superiority. We move quickly from description to explanation.
Let’s face it. That leap makes us feel good. It gives us closure. Behavioral scientists call this instinct “explanatory satisfaction.” We’ve all felt it. When an explanation confirms your priors, it feels insightful, even obvious — often enough to stop interrogating it. Market participants are addicted to that feeling. Hell, the entire prognostication industry is built on feeding it.
Five-year backtests beat the index and suddenly a new fund is launched. A hockey-stick chart appears with an arrow labeled “new strategy,” and the growth that follows is treated as proof of causation.
High probability is never certainty. Our minds simply collapse the distinction.
No executive gets on an earnings call and says, “There’s a one-in-four chance we miss.” They say, “We’re confident.” But investors, and thus markets, price this confidence. The uncomfortable reality gets pushed aside. When it materializes, it’s labeled a shock.
But it was never a shock. It was always sitting there in the distribution. We just chose to hear the upper end more loudly.
Every trade is an implicit bet. Every price reflects a set of odds about what happens next.
And yet the language around those odds rarely sounds like probability. It sounds like conviction. It sounds like momentum. It sounds like inevitability.
Humans are hardwired to prefer leaders who speak in absolutes. We anchor on the midpoint and discount the long tail.
Until the tail arrives.
The Weed in the Index
In agriculture, there is an effect known as Vavilovian mimicry. It describes how weeds evolve to survive by resembling the crops around them.
Farmers walk the rows in their fields and pull anything that does not look like their crop. The obvious weeds are removed first. The ones that resemble the crop get missed. Year after year, that process creates evolutionary pressure. Traits that resemble the crops live on. Traits that look different do not. Over time, resemblance becomes a survival advantage.
Capital markets are subject to these same pressures.
Investors build screens. Index providers define their criteria for inclusion. Analysts and portfolio managers converge around their preferred metrics.
But filters do more than measure quality. They influence where capital flows. And capital determines survival.
Companies that look like crops attract liquidity. They benefit from a lower cost of capital. They gain flexibility. Companies that look more like weeds face higher scrutiny, less liquidity, and fewer options.
That is evolutionary pressure.
Once the criteria become known, behavior adapts. Companies begin to study for the screen the way students study for the test.
I believe there are two distinct layers of selection pressure operating in public markets.
The first layer is optical.
Stock screens reward a certain silhouette. Growth, margin expansion, free cash flow, and a coherent story.
Companies notice. Then the smoothing begins. “One-time” becomes a category, not just an event. Integration gets adjusted away. Restructuring remains “nearly done.” Costs find their way into add-backs, corporate, or the next quarter. Segments get re-labeled. The deck gets sharper.
Over time, the presentations all look the same. Durable demand. Operating leverage. Expanding TAM. Long runway. Different logos. Same story.
This is not fraud. It’s adaptation.
When the market signals what it wants, companies are rational to optimize their resemblance to it.
The second layer is structural.
Index inclusion carries enormous upside. It brings liquidity, passive flows, and a lower cost of capital.
Eligibility rules around profitability, float, share structure, and governance do more than filter companies. They define incentives. When inclusion materially affects valuation, structure is bound to follow. Share classes get simplified. Capital structures get adjusted. Governance evolves.
This is not just cosmetic either. It is true adaptation.
When index membership carries so many consequences, it stops becoming a label and becomes an objective.
This is deeper than presentation. It is environmental conditioning.
The issue here is not whether screens and indexes are useful. They surely are. The issue is what happens once all the rules become transparent. If everyone knows the criteria, then there is a race to converge.
Here’s the uncomfortable truth. Most companies are statistically ordinary. Nothing special about them.
That is the base rate.
Only a remarkable few are truly exceptional. Yet nearly every management team I have ever met believes it sits in that distant right tail.
In an ecosystem shaped by screens and index inclusion, it is rational to resemble what gets rewarded. It is rational to smooth volatility, refine structure, and tell a cleaner story. Over time, resemblance increases and true differentiation gets harder to find.
The fact is that most companies are not crops. They are weeds that have learned to look like crops.
That is not an indictment. It is the rational outcome of the pressures being applied.
Farmers who understand how selection works are better at spotting what actually belongs in the field. Investors who understand how these forces shape companies have a better chance of distinguishing between resemblance and resilience.
From the Field: Value in the Good. Credibility in the Bad.
In a meeting last week, a colleague of mine in investor relations, Bryan Dunn, said something that struck me immediately. I told him on the spot that I was stealing it. So, here I am, stealing it — with full credit, of course.
He said:
“Good results are an opportunity to build value. Bad results are an opportunity to build credibility.”
In this business, quarters matter. Tone matters. Words matter. That’s why the line stuck with me.
When results are strong, everyone feels good. The rhetoric feels more believable. Optionality increases. You feel as though the future is written. The story gets believed, and momentum builds. Good results create breathing room.
It's what leaders choose to do with that room that often determines whether the market sees progress as durable or temporary.
But I keep coming back to the second half of Bryan’s quote.
Bad results hit differently. The air changes. The room closes in. The conversations get tighter. The questions get sharper. The language gets careful. There is no momentum to lean on, no narrative to hide behind. In those moments, it’s no longer about valuation. It’s all about trust.
I’ve watched leaders try to explain their way out of a bad quarter. And I’ve watched others own it in two sentences and move on. While the market reaction may be instant, and it often is. What investors remember, however, is the tone. They remember whether leadership sounded angry, defensive, accusatory, or clear, calm, and collected.
Bryan is right.
Value is built when everything is working. Credibility is built when it isn’t.
Signal vs. Noise
Probability Theater — We call something “80% likely” and behave as if the 20% is a rounding error. Markets do not implode because risk exists. They implode because we priced the range as if only one outcome mattered.
The Mold — Once the market publishes the answer key, companies adapt to it. Over time, decks converge, metrics align, and narratives rhyme. Different logos. Same rhetoric.
Character Quarter — Anyone can sound visionary in a beat. The miss is when the tone is tested. Investors remember whether leadership owned the numbers or argued with them.
One Last Thing
When the 20% outcome arrives, we often jump to call the 80% forecast a mistake.
It wasn’t.
The math did not fail. The unlikely simply occurred. That is how probability works. If the 20% never happens, the 80% would not be a probability. It would be a guarantee.
Markets do not malfunction when the tail shows up. They function exactly as they should.
If this letter resonated, I’d love to hear from you. And if you know someone who’d find it interesting, feel free to pass it along.
Until next month,
— Zachary