I’ve always been fascinated by the role that beliefs play in market returns. The belief in things getting better, things getting worse, why the winners win, why the losers lose and everything in between.
There’s an absolute cacophony of voices forecasting and predicting the future every day. Get it right and you’re a guru who saw it coming, get it wrong and surprisingly few people care.
One thing that perhaps isn’t discussed enough is the role of luck.
Probably because it’s impossible to quantify and far too superficial to market any kind of investing strategy around.
And if you talk about getting lucky too much, people might think you’re a bit dumb.
Fortunately, I don’t have ANY hangups about that so let’s take two contrasting arguments and explore the role of luck.
Argument 1: It doesn’t matter what you do or how intelligent you are, everything is decided by randomness
What factors, then, determine how individuals become wealthy?
Could it be that chance plays a bigger role than anybody expected?
And how can these factors, whatever they are, be exploited to make the world a better and fairer place?
For this study, the team created a computer model of human talent and the way people use it to exploit opportunities in life. The idea was to study the role of chance in this process.
The results are something of an eye-opener. Their simulations accurately reproduce the wealth distribution in the real world.
But the wealthiest individuals are not the most talented (although they must have a certain level of talent).
They are the luckiest.
And this has significant implications for the way societies can optimize the returns they get for investments in everything from business to science.
Their conclusion is so nihilistic.
It doesn’t matter what you do, you might just be unlucky.
While this is undoubtedly true on some level, it’s nowhere near the full picture.
(And if you truly believe this, you’ll HATE what comes next…)
Let’s take Bill Gates as an example.
Microsoft’s innovations have undoubtedly changed the world for the better.
Bill Gates is massively wealthy, although it’s worth remembering that much of that wealth is tied to the continued success of Microsoft.
So did Bill Gates just get lucky?
Well, he was definitely fortunate to be given an opportunity in early life:
Bill Gates was a child that was easily bored by his studies, so in seventh grade, Gates was taken out of public school and sent to a private school called Lakeside that catered to Seattle’s elite families.
Half a year later, they started a computer club. This computer club was funded heavily by the Mothers’ Club, starting the club off with a fund of three thousand dollars. “This was an amazing thing because this was 1968,” Gates said.
Most colleges didn’t even have computer clubs, let alone the computer that the Mothers’ Club bought for the Lakeside computer club. This wasn’t just any ole’ computer, this was an ASR-33 Teletype which was a time-sharing terminal with a direct link to a mainframe computer in downtown Seattle.
Bill Gates had an extraordinary opportunity to do real-time programming as an eighth grader in 1968
An opportunity that Gates FULLY harvested to create one of the most valuable companies in the world.
The boy was obsessed years before he became a man.
Did he really just get lucky for the next 45 years…?
Argument 2: People make their own good and bad luck
I have a lot more sympathy for this view.
The idea that luck plays a role in providing opportunity, but our attitudes shape the outcomes…
Here’s an excerpt from ‘The Luck Factor’ by Richard Wiseman. He had people categorise themselves as lucky or unlucky:
Take the case of chance opportunities. Lucky people consistently encounter such opportunities whereas unlucky people do not.
I carried out a very simple experiment to discover whether this was due to differences in their ability to spot such opportunities.
I gave both lucky and unlucky people a newspaper, and asked them to look through it and tell me how many photographs were inside.
On average, the unlucky people took about two minutes to count the photographs whereas the lucky people took just seconds.
Why? Because the second page of the newspaper contained the message “Stop counting – There are 43 photographs in this newspaper.”
This message took up half of the page and was written in type that was over two inches high. It was staring everyone straight in the face, but the unlucky people tended to miss it and the lucky people tended to spot it.
Just for fun, I placed a second large message half way through the newspaper. This one announced:
“Stop counting, tell the experimenter you have seen this and win $250.” Again, the unlucky people missed the opportunity because they were still too busy looking for photographs.
This excellent anecdote highlights how openness to opportunity (the belief that opportunity exists) is a factor in outcomes.
(although I can’t help wondering if the luckiest people were the ones who missed the first message but spotted the second one)
Another of Wiseman’s experiments is more relevant to markets 👇
Personality tests revealed that unlucky people are generally much more tense and anxious than lucky people, and research has shown that anxiety disrupts people’s ability to notice the unexpected.
In one experiment, people were asked to watch a moving dot in the centre of a computer screen. Without warning, large dots would occasionally be flashed at the edges of the screen. Nearly all participants noticed these large dots.
The experiment was then repeated with a second group of people, who were offered a large financial reward for accurately watching the centre dot.
This time, people were far more anxious about the whole situation.
They became very focused on the centre dot and over a third of them missed the large dots when they appeared on the screen.
So there’s already a financial pressure creating some level of anxiety.
Imagine adding more by entertaining the idea that the market is somehow out to get you, broker’s hunting your stops, you’re not as smart as other traders…
It’s even worse if you’re over-leveraged.
With a run of losing trades it’s easy to fall into a pit of despair and believe that the market has turned against you. How could anyone win under these circumstances?
Once you wade through that bullshit and recognise that markets offer an abundance of opportunity and the hardest thing is choosing which opportunity to pursue, wouldn’t you expect better results (and less anxiety)?
Traders might not remember their early days, but most come into the game expecting ‘easy money’.
Many actually get it early on: Beginner’s luck is a known phenomenon. It might be confirmation/survivorship bias. Either way, it doesn’t last.
Beginner’s luck is thought to end once a player gets involved with a game, and the “innocent” psychological mindset is replaced by one that is concerned with the nuances of the game.
Speak to anyone who’s been in the business for long enough, and the journey’s nearly always the same. Full Circle…
Simple innocence & beginner’s luck > Market punches them in the face > Add a load of complications to account for nuances > Return to simplicity (without the innocence/naivety)
But they’re still in the game. Taking risks. Trying to capture a handful of the abundant opportunities that markets offer. Believing that good things can happen.
And somehow, those people tend to ‘get lucky’.
There’s loads of clichés around this topic.
One popular one is “The harder I work, the luckier I get”
But I don’t think that’s quite right for markets. Often, less is more.
The ‘work’ is more about taking deliberate, intentional risks & then getting out of the way.
Which to use another cliché “increases the surface area for luck to attach to”.