Luck
There is a tide in the affairs of men
Can boldness or good preparation improve our luck? Does heaven help those who help themselves? Are some people simply luckier than others? Is there such a thing as giving luck a chance? All good questions. Let’s take a look.
Before we get started let me set out in a nutshell the role of luck in investing as I see it. My view of the stock market is that: (1) it involves a very high degree of skill; (2) every good decision and action taken in the stock market can potentially have an unlucky outcome; (3) every bad decision and action taken in the stock market can potentially have a lucky outcome; (4) over the short to medium term, investment performance can be dominated by good and bad luck; (5) over the long haul, unlucky and lucky outcomes will balance through the law of large numbers and reversion; (6) over the long haul skill will determine performance; (7) luck plays a much larger role in investing than most people believe (because they believe all good outcomes are the result of skill); and, (8) these conclusions are valid even if it is thought that the average skill level of investors is increasing as the years go by.
Does fortune favor the bold?
John Neff managed the Windsor Fund for more than 30 years. Over the period when he was at the helm, the average annual total return of the Windsor Fund beat the S&P 500 by 3.15% per annum. John Neff on Investing is a book he wrote describing how he came to investing, how he achieved those results and his experiences as a fund manager. (Neff, 1999)
When Ma Bell was broken up and formed into a number of regional Bell operating companies, John Neff saw opportunity. As he put it: “Not ones to hem and haw, we bought the hell out of that group before and after the breakup. At one point, telephones represented around 16 percent of the Windsor Fund. In this, as in other opportunities, Windsor was quick and hard-hitting. We were not always right. But without the resolve to storm the Bastille when we believed we were right, we’d have sacrificed much of Windsor’s upside to guard the downside. In telephones, we were absolutely right. We banked handsome gains in a couple of years.” (Neff, 1999)p.111.
Here Neff was investing based on the strength of his convictions. In Part 7: Building and Managing a Portfolio, I discuss Warren Buffett’s admonition to take ‘meaningful positions’ when opportunities come along. This is not risk seeking behavior in the behavioral bias sense. It is ‘betting your beliefs’, an expression I discuss in a post titled Lessons from the world of gambling.
For present purposes all we need to do is reflect on whether John Neff’s handsome gains were the result of luck. They might have been, to some extent, but I would argue that the largest contributing factor was his skill in identifying and analyzing the opportunity and his boldness in ‘buying the hell out of the group’. I would further suggest that the role of luck was minimized.
I am not for a moment suggesting that boldness requires an investor to over bet. There is a right size investment to make in any situation. Part of the skill of investing is determining how much of a commitment to make at any time. We look at this in Part 7: Building and managing a portfolio.
The wisdom of taking advantage of opportunities as they present themselves has long been recognized.
The old proverb that ‘fortune favors the bold’ has its written origins in second century B.C. Greece. It was adopted by the Romans and took the form: ‘fortes fortuna adiuvat’. It referred to Fortuna, the goddess of luck. It suggests that Fortuna is more likely to help those who take risks.
It might be thought that the bold are more likely to be lucky and the timid are less likely to be lucky. I don’t think so. The bold may seize the moment but they achieve results through boldness and skill, not because Lady Luck smiles on them.
Men have thought about Lady Luck throughout history.
The Latin aphorism carpe diem means to “seize the day”. It comes from the Roman poet Horace.
Babur who founded the great Mughal Empire in Delhi in the 16th century which lasted for 300 years, wrote a memoir. His advice as quoted by Margaret MacMillan in History’s People, p.283,
“It is important, when opportunity knocks, not to waiver in determination. Regrets later on are useless.”
And we can’t leave this subject without a quote from Shakespeare. Brutus is speaking:
“There is a tide in the affairs of men.
Which, taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat,
And we must take the current when it serves,
Or lose our ventures.”
Julius Caesar Act 4, scene 3, 218–224
The tide in the affairs of man may not be quite as regular and predictable as the tides in a saltwater port. But there are tides and opportunities in the world of business. Opportunity does knock. The level of boldness needed to invest in common shares is not that high. And, success through exercising boldness is a matter of skill not luck.
The courageous may take heart but, before boldness must come skill. Boldness without skill is a recipe for disaster.
Preparation meets opportunity
Seneca, the Roman philosopher wrote in the mid first century AD: “Luck is what happens when preparation meets opportunities.”
Let’s change Edison’s adage to say success is 90% perspiration, 5% inspiration and 5% luck.
Adding luck as a factor still means that that most success comes down to hard work.
Seneca’s admonition to prepare well might lead to more success and better investment performance. But, would it bring more luck?
Assuming the investor applies all his skills and does the necessary homework, I think the answer has to be ‘no’. In this optimum situation there is no doubt the luck will come into play. And, of course, the luck might be either bad or good; no one can predict.
But, it doesn’t make sense that the well prepared investor will experience more good luck because of his preparation.
Of course, poor preparation will lead to poor results. But even there, poor preparation behind an investment decision can, with luck, lead to a wonderful result. Just don’t expect to get too far on luck alone.
Does heaven help those who help themselves?
We can deal with this one quite quickly. It is not a quote from the Bible. Wikipedia suggests the expression or something like it goes back to the Greeks.
The thought is that if you help yourself, God or heaven or lady luck may come along and give you a little boost.
There is no need to enter into a religious discussion. It just makes common sense that everyone can do things to help themselves and that good things will come of it. And, perhaps, one good thing will lead to another. There is no need to posit that those who help themselves get an extra helping of good luck.
In truth, if there is something we can do to improve our chances. It is skill, not luck.
The lucky general
Napoleon is supposed to have said: “I know he’s a good general, but is he lucky?” Napoleon was certainly bold and one can imagine he liked his generals that way too. This quotes suggests that Napoleon thought some generals were luckier than others.
Napoleon was no fool and he might not have even said this. What does it suggest?
If one of his generals had some victories as a result of luck, this did not make him a better general. This would be like judging the capability of a money manager base on some recent lucky results.
Perhaps Napoleon was simply noting that his preferred general acted with boldness; knew that luck was always a factor on the battlefield; did not get discouraged in face of setbacks; generally had the ‘right stuff’; was well prepared; and made sure that the troops under his command were well prepared.
Fortune would smile on such a general. And fortune would smile on such an investor in the battle for investment survival.
Conclusion
The bottom line is that luck plays a much larger role in investing than most people believe. It tweaks our egos when we think brilliant results have been caused by skill when, in truth, they may have been caused by luck. And that can be dangerous.
However, lady luck is even handed. There is no such thing as some people being luckier than others. Of course, some people are so risk averse that they leave nothing to chance. They will not enjoy much luck, either good or bad.
For further reading on this and related subjects see Part 3: Thoughts for the Individual Investor which contains
Chapter 20. The Right Stuff
Chapter 21. Developing Expertise
Chapter 22. Luck and investing
Chapter 23. Decision making under uncertainty
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