I think it could be very likely that we underestimate the role of Luck or even just simple Market Beta, whereby Markets over the long term tend to go up; so as long as we hold a large enough basket of half-decent Quality Stocks, then it is almost impossible not to make money if we are swimming with the powerful flow of the river.
I’ve been fixated by this subject for some time now and we even discussed it in the Podcast TPI 36 which you can hear here:
It’s been obvious to me for a long time that Luck, both Good and Bad, has quite an impact on the performance of my Portfolio and I suspect many Investors (and Traders) might not fully appreciate, or even bother considering, what kind of influence Luck has.
I’m in no doubt that most of us like to think that the Returns from our Portfolios are largely down to our own sheer genius, talent, skill, and endeavours, but the rather inconvenient truth could well be that Luck plays a much more significant part than we would care to admit. Perhaps that is why we think so little about it.
Of course, if our Portfolios lose money, then that is Bad Luck !!
Something like over 90% of Leveraged Traders lose money, yet if a Survey is done, then over 70% of them will say they make money. Clearly these two propositions cannot both be true. But because we are all Geniuses, few of us are able to admit that in truth, we are by no means perfect, and we make avoidable and silly errors with scary frequency.
However, it might well be worth thinking about because if Luck really does make a difference to our Returns, then maybe there are behaviours that we can adopt that might minimise the Bad Luck which can drag down our Portfolios and, in tandem, bring along considerable mental angst; and we can maximise the Good Luck so that when it shines upon us, we can make out like Banditos .….(I’m not referring to the Corn-based Snack of the same name).
Or is that Doritos? Whatever, that is not the point…
I like those Tangy Cheese ones though……….. hmmmmm……….
Where was I? Right, something that I keep thinking about (apart from Corn-based Snacks and Potato Crisps, obviously), is that whenever something happens to my Portfolio, both Good and Bad, I should ask the question:
“Was that down to Luck or Skill? And what could I have done differently?”
I think if we can adopt this kind of habit, then it might help to analyse what we are doing and to focus on the whole Luck vs. Skill issue and to help optimize our Portfolio Returns. Clearly if the event is a negative one, then we need to amend the question along the lines of:
“Was that down to Bad Luck, or could I have done something differently in advance, to eliminate the hit or reduce its impact?”
Anyway, in Part 2 of this Blog I intend to look at habits we can adopt to reduce Luck, but first off, I will run through some practical real-world examples of where Luck has definitely played a part.
Examples of where Luck has played its part
That’s outlined plenty of examples of where Luck (both Good and Bad) can influence how our Portfolios perform. I am sure if you start thinking carefully about both things that have happened to your Portfolio in the past, and if you pay more attention to the role of Luck going forwards, you will start to appreciate that Luck does make quite a difference.
It is important to realise that Skill is truly enduring and if you are still in this game in 5 years time, and especially if your Returns are improving and you are feeling more confident and capable, then you can be pretty sure that you have a handle on the Luck aspects and you are acting with behaviours that maximise the Skill elements.
One of the worst things that can happen is Beginner’s Luck. I am not suggesting that the kind of battering I suffered in my first few years of Investing is good for anyone (quite honestly, how I stayed in the game and didn’t just sell everything in despair is a mystery), but certainly a year where you lose maybe 15%, helps to focus your mind and motivate you to work hard in terms of learning the skills needed to make money. If you have a cracking few first years of Trading/Investing, it is easy to get over-confident and way, way too cocky. When that happens, the Market will take you down mercilessly and the kind of kicking we got back in March/April 2020 will have shaken many Newbies to the core.
It is definitely better to fail a bit in the first few years and to learn to treat the Markets with respect and to understand that you cannot rely on Luck to make money over time. You have to put in the effort and the hours, and to work in a methodical way with a clear Strategy and the necessary underlying tactical behaviours to make it work.
It is better to Fail and Learn, than to Succeed yet be Clueless.
‘Til next time,
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