Other people's winnings are no reason to sit at the table
Hsieh drew the rule from poker. It applies with more force to markets, where the players who understand the game are the ones taking the newcomers' money.
Don’t play games that you don’t understand, even if you see lots of other people making money from them.
Tony Hsieh spent a stretch of his years at Zappos playing poker seriously, and in his book Delivering Happiness, published last June, he listed what the game taught him about business. An excerpt ran on the Huffington Post under the title ‘Delivering Happiness’: What Poker Taught Me About Business. This rule is one of them, and in poker its logic is plain: at a table where others are winning and the newcomer cannot see why, the newcomer is usually the one they are winning from.
Markets work the same way, and the last three years supplied a large example. Banks, pension funds and local governments around the world bought securities built from American mortgages because others were earning well from them. Many buyers could not have explained what sat underneath the paper. When the housing market turned, the people who understood the structures had often sold or bet against them, and the rest absorbed the losses.
Startups meet a smaller version of the same temptation. A wave of companies raises money for some model, whether group buying, social games or virtual goods, and founders with no experience in it start to copy it because it seems to be working. They see the revenue and miss the part that makes it work: a supplier relationship, a data advantage, a cost of acquiring customers that only looks low for the first movers.
The rule could be read as advice to stay out of anything new, which would be wrong. Every market begins as a game no one fully understands, and the founders who win it learn it faster than the others. Hsieh’s own answer, in the same list, is to figure out a game while the stakes are low. Play small, watch closely, and raise the stakes only once the reasons for winning and losing are clear.
The warning sign, then, is not novelty. It is the combination of rising stakes and a lack of understanding, with other people’s success standing in for an explanation.