How smart people broke their rules

When Facebook started, it was an exclusive club.

Many people knew about it. Many people wanted it. But only a few actually had it.

In 2004, Mark Zuckerberg started a network of people-profiles. It was meant only for people on his campus: Harvard University.

Admission to Harvard University itself was an exclusive club.

Having an account on Facebook put that exclusivity on the internet.

Facebook was a sort of virtual campus for students. As more Harvard students joined, FOMO grew.

FOMO: fear of missing out.

Soon, other top university students wanted to join. Mark opened the network to other students from top colleges.

Within a few months, Facebook opened to top universities outside the USA.

As the number of students on Facebook grew, the number of people wanting to join Facebook grew too.

Each Facebook user had a profile page. On this, they entered details like their age, hobbies, opinions, etc.

But there was a catch.

It was limited to within campuses.

A student at Stanford University could not see the profile of someone in Harvard University and vice versa.

They introduced a new feature to bridge this gap.

A student could ask permission to view someone’s profile. If that person approved, the profile would be visible.

This is what later became the ‘friend request’.

Till this point, Facebook seemed like buying a Ferrari.

It’s not just about the car. It’s about the exclusivity. It’s about the status.

Exclusivity is an extremely important aspect of any ‘closed-door’ business.

Many luxury brands burn their excess apparel. This is to ensure that their unsold products do not get sold at a discount – to keep them exclusive.

In its very early days, Facebook was like that.

Online social networking websites were not new. But none of them were successful. They were riddled with scammers. Nobody trusted the websites.

Facebook was successful.

And exclusivity was how it became successful. It was an online community for people who already knew each other.

Mark Zuckerberg was seeing more and more people wanting to join Facebook.

In 2006, Mark Zuckerberg did something he had no plans for 2 years ago. He removed joining restrictions. The exclusivity was gone.

The closed-door Facebook, became open-door.

Anyone older than 13 years old could join Facebook. This was the birth of Facebook as we know it today.

Facebook has over 3 billion active users (in 2024).

Facebook purposely scrapped a key rule of the company.

Doing so allowed them to succeed.

Apple, Google

Steve Jobs and Apple are famous for having a closed ecosystem.

Which means, they do not like other’s software on their devices.

In most cases, the hardware and software used in computers are made by different companies.

Google makes Android (software – operating system). The smartphones that run Android are made by Samsung, OnePlus, Vivo, etc.

Similarly with computers.

Microsoft makes the operating system (Windows). Companies like Lenovo, HP, Asus, etc. make the computers.

Apple specilizes in blending its software with its hardware to offer a smooth experience.

They had been extremely reluctant towards allowing others’ services inside their ecosystem.

Even with the iPhone, their initial plan was to not allow third party apps on it.

Only Apple would make all the apps.

It was only after a lot of internal and external discussion that they allowed third party apps on the iPhone.

Today – we can’t imagine iPhones without third-party apps.

Along similar lines, recently, Google was sued for having a monopoly on online search advertising.

In its initial days, Google’s founders hated the very idea of showing ads on Google.

There are many such examples – cases where strongly held beliefs were changed.

In Investing

Jack Bogle:

The world of investing has its own share of cases where strongly held beliefs were abandoned or temporarily ignored.

Jack Bogle is famous for having invented index funds.

His idea was simple: in America, fund managers had failed to deliver returns higher than the index.

So he created index funds. These funds would blindly copy the index (like S&P 500, Nifty 50, etc).

No fund managers would decide which stocks to buy, sell, and hold.

Over the next few decades, his idea turned out to be right. Index funds gave better returns than most American mutual funds.

Jack Bogle was the champion of passive funds – mutual funds without a fund manager.

At the same time, Jack Bogle’s son was a fund manager – of an actively managed small cap mutual fund.

The fund had given returns higher than its benchmark for 14 years.

It later started underperforming.

But the fact remains – Jack Bogle’s own son had successfully managed a mutual fund for a good 14 years.

Warren Buffett:

Warren Buffett had long maintained that he did not understand technology – and stayed away from investing in technology stocks.

Today, he has investments in a few tech companies.

What’s surprising is that his biggest investment is in a tech company – Apple.

Benjamin Graham:

Warren Buffett’s mentor, Benjamin Graham, was an ardent value investor.

He bought undervalued stocks, and sold them when they became overvalued or fairly valued.

Graham made one exception.

When he saw a great company, he shunned this rule.

He spend nearly 25% of his money buying shares of an insurance company called GEICO.

The shares of GEICO weren’t undervalued.

It was more of a growth stock – overvalued but had the potential to grow very fast in the future.

Ignoring his own rule worked out well for Graham.

He made more money from GEICO than any other investment ever.

Extremely Rare

Ignoring rules can be good.

But there is a reason rules are in place. Most of the times, it is not a good idea.

This lesson is probably not a good lesson for new investors.

It is necessary to understand: yes, ignoring rules can be good – sometimes.

This ‘sometimes’ is not as common as it may seem.

The greatest of investors have broken their key rules only for extremely rare investments.

Maybe something like a once-in-a-lifetime opportunity.

For all other times, they strictly followed their rules.