Firms and Firmaments
From Meta to Michael Jordan to Mr. Beast: how star performers are made, what they’re really worth, and when you’re better off in their orbit
Hey friends,
It’s 13 degrees in New York City, but this newsletter is hot off the press.
In last week’s dispatch, we established that the modern market is increasingly becoming a competition that rewards relative performance over absolute performance. Success is no longer about how fast you can run, but how fast you can run compared to your peers.
In today’s dispatch, we are switching up the metaphor and laying out the hidden dynamics that undergird these outliers. I know you’re going to enjoy. Don’t forget to like and subscribe!
In The Beginning…
In academic research, all of the fastest runners are called “star performers”—the remarkable individuals and outstanding companies that achieve massively disproportionate, right-tail earnings relative to their peers. These are the Mag Sevens, the Michael Jordans, Kendrick Lamars, Albert Einsteins, Warren Buffets, Serena Williams, or Mr. Beasts. Not just excellent operators, but undeniable winners.
Star performers exist anywhere that an objective, results-focused performance metric can be established. Just like the formation of actual astronomical stars, star performers are born within extremely unique conditions which, directly or indirectly, provide the materials necessary for their emergence. In astronomy, these environments are called stellar nurseries. These spaces provide two very key ingredients for the genesis of both firms and firmaments: chance and timing.
If Bill Gates hadn’t attended one of the only high schools in the 1960’s that had a computer, there would be no Bill Gates. If Paul McCartney hadn’t been looking for girls to flirt with and then wandered into a small church in Liverpool, he would never have met John Lennon. Many of the celebrity executives of today’s tech companies aren’t super savvy operators, but were actually average operators in an industry that was guaranteed to produce above-average profits with or without them. These serendipities don’t subtract from the achiever’s accomplishments; but it is vital to understand that, generally speaking, you can’t spell success without L-U-C-K.
Portable vs. Non-portable Stars
Say that a star salesperson earns their company 8 million dollars in sales annually. They then leave their company and join a competitor. How much did the first company lose? How much did the new company gain? Most people would calculate the obvious: minus 8 million from the old firm and plus 8 million to the new firm (give or take a little). But the reality is much more complicated.
Firstly, not all stars are created equal. According to the academic literature, there are portable stars and non-portable stars. Portable stars are those performers who can work their magic regardless of what team, company, or macro-environment they’re placed in. Non-portable stars are the operators who, if separated from the resources and support they are being given, regress to the mean.
Michael Jordan was a portable star—his best years on a team came from his time with Scottie Pippen, but even when transferred to a different team he still personally dominated the league. Wall Street, however, is full of non-portable stars, with countless equity analysts whose stellar results depend on their current firm’s proprietary systems, research culture, and products, such that their performance drops significantly once they move to a rival bank. These are oftentimes the individuals who have over-indexed on a single specialty or are too embedded in a specific niche. (Remember: diversify, diversify, diversify.)
If we return to the question of our salesperson, we can say that the value transfer is entirely dependent on what kind of star he or she is. If they are non-portable, then both the salesperson and the receiving firm have made a grave mistake.
Galactic Migration
When actual stars (the ones in space) leave their galaxies, there is a term for it. It’s called galactic migration—and the end result is a completely re-ordered star system. Similarly, studies show that the result of a star performer’s migration to a new company is a brand new firm with a brand new pecking order.
Just because that salesperson won’t be making the firm 8 million dollars doesn’t mean that the value is automatically forfeit. Studies show that the result of a star performer’s migration is often an increase in the effectiveness of other team members, who now enjoy access to the resources, attention, and opportunities that were previously given to their outstanding peer. The vacancy also provides motivation for others to step up their game and shine the brightest. Also, star migrations often hurt the receiving firm’s performance at first, as veterans resent the imported celebrity and the star needs time to adjust to their new ecosystem.
Whether or not the old firm can make up for the loss of the star can only be evaluated on a case-by-case basis, but the moral is clear. Focusing too much on one star can produce blind spots to other areas of bright, shining value. In order to manage stars effectively, there needs to be constant care and evaluation of how resources are being distributed. If you’re receiving a star into a new environment, think long about how to make that transition smooth, and consider whether or not you’re willing to accommodate their needs.
However, there is nuance to this. While a star performer’s departure is often a boon in industries where performance is the primary driver of value, it is often a blight to industries where attention is paramount. WNBA star Caitlin Clark’s teammates might score more when she is not playing, but the game itself will still sell significantly less tickets. When gamer extraordinaire Ninja left the streaming platform Twitch, the number of views that his “competitors” were receiving took a massive nosedive. Ninja’s gravity was pulling eyeballs into the ecosystem that the less popular creators weren’t able to pull.
In these industries, it’s much better to play in the orbit of a larger star than risk a supernova. And just because you’re not the North Star doesn’t mean you can’t be part of the constellation.
A Theory of Relativity
Modern markets are just as much about optics as they are about objective reality. Remember, the key to mastering winner-takes-all markets is learning to think in relative, not absolute, terms.
When Meta announced that they had successfully hired engineers from Apple, the result was a small but noticeable drop in Meta’s stock price. Despite an obvious increase in overall talent, the market saw this transfer as a negative. Why? Because when talent transfers to a company that is regarded as better than the old company, it is more likely to be perceived as a positive for the new firm. But when the talent is transferring to a company that is regarded as lesser than the old company, the transfer is likely to be viewed as a negative.
From a qualitative and valuation perspective, Apple is a superior firm to Meta and the market has more confidence in Tim Cook’s ability to steward star performance than it does Mark Zuckerberg’s.
So even though the talent was being upgraded, it was perceived by the public as an expensive and risky purchase. The crowds are also wise enough to know that a receiving firm is going to temporarily dip in performance (see above), so the stock reacts in kind. Ostensibly, even the titans of industry are susceptible to the laws of relativity.
Conclusion
In the next newsletter we are going to dive deeper into the theory of managerial relativity and discuss how star status can be sabotaged, manufactured, or fast-tracked. We will also discuss the opposite side of “success brings more success” by exploring the psychology of underdogs and why we love a comeback. In the meantime, here are the takeaways from today’s dispatch:
Don’t over-attribute success to individual genius; in most cases, “star performance” is the product of talent and a very specific environment.
Be skeptical about poaching or hiring stars without understanding how portable their performance really is, and how much of their edge is embedded in their current firm’s systems, culture, and brand.
Think in relative, not absolute, terms: your seat in the constellation often matters just as much as your raw skill, especially in winner-take-all markets.
As always, thanks for reading. Hit that heart button down below and make sure you’re signed up for the next one.
Feathers For The Footnotes (Bonus Links)
About the Author
Bradley Andrews is a hopeful rabble-rouser on a mission to inspire the world. Stay in touch with what he’s doing outside of Mercury’s Playbook by subscribing to a weekly digest of his activity through micro.blog. This will send you writing, photos, and other curiosities that extend beyond the scope of this newsletter.