Luck or Skill

osaka-castle

24 Nov Luck or Skill

I am typing this post while holidaying in Osaka. Few days ago, my girlfriend and I was supposed to travel to Kyoto and spend a night in a temple. As it was autumn, the sun set pretty early at around 4pm. We navigated in the dark and Google map pointed us to a temple which was closed. In fact, many temples were closed. We were pretty lost and wondered if we would ever get to the right temple. My girlfriend tried asking passer-bys for directions. Most did not know about the temple although they were trying to be helpful. Just as I suggest we put up a place in a hotel nearby, my girlfriend tried asking another passer-by. We were lucky to meet an English speaking Japanese and who seemed to be familiar with the area (his friend dressed as a monk). They walked us to the temple and we managed to check-in that night. On hindsight, we discovered that Google map pointed us to a wrong temple. Luck has helped us find our place of stay. It was not our skill in the Japanese language or excellent understanding about the area which got us where we wanted to go. Also, we became lucky because of my girlfriend’s perseverance.

Since I was a child, I was taught that success is a result of hard work.  I was told that studies was important and my job as a school goer was to put in enough effort and get good grades. A good educational qualification is a gateway to a good paying job and a “successful” life. It isn’t wrong to think this way as a graduate does have access to certain jobs that a non-graduate does not. But most of us who went through the educational system and transited into working life know that academic qualifications do not guarantee you a future. The differences in skills among others and myself are minimal – my colleagues are able to do most of the things I do and vice versa. The main difference between those who promote faster and those who do not is about opportunities. It is likely the former was presented the opportunities and they managed to perform well. This opportunities become reasons for their promotions. Those who are successful and rich will tell you how hard they worked and how skillful they are. But they will not equally acknowledge the role of opportunities in contribution to their success. Humans have funny biases – We often attribute success to our own skills and failure is a result of bad luck.

(Malcolm Gladwell touched on opportunities extensively in his book, Outliers. He mentioned about two high IQs individuals, Chris Langan and Robert Oppenheimer. The latter was a more successful individual because of the backing of his wealthy family and his good social skills. The IQ was not a crucial determinant for success. You can read more about it in this book summary)

Jon and I discussed about the role of luck in successes. Interestingly, we observe the role of luck in one of our breakfast outings at a popular curry rice stall in Tiong Bahru. We both concurred that the dishes were mediocre but we witnessed many people willingly queue for the food. In terms of skill, the cook is not of Michelin standard. In terms of profitability, I bet there is a decent amount of income. We believe the stall owner was at the right place, at the right time, and serving the right crowd.

We know that trying to pick stocks can be very frustrating. Skip that frustration, get 21 ideas to finding profitable stocks in an instant. 

Stock picking involves a lot of luck. Jon would argue with you that if Warren Buffett was in Japan, he would not have done well during the lost decade with his basket of carefully selected Japanese stocks. Being at the right country does make a big difference to your success.

No matter what method you adopt to buy and sell in the market, you cannot ignore the role of luck in investing. We can only evaluate stocks based on historical performance (applies to both Fundamental and Technical Analysis). The future always remains unknown and full of possibilities. We tend to find patterns and reasons why a stock should outperform in the short term (trader) and in the long term (investor) based on observations of past data. We place out ‘bets’ for the future and find comfort after we have done our due dilligence. We believed we deserved to be rewarded for our skill. Like it or not, we cannot control the outcome. Jon and I wrote about control in our previous posts here and here.

To invest successfully, you either

  • position yourself with the odds in your favour, or
  • limit the role of luck
I do not have a clearly defined solution for the first bullet. If you trade or invest with a set of rules or a system, you can calculate the expectancy of your trading strategy. If you are a discretionary trader or investor, it will be harder to calculate your edge. You may have to evaluate which selection criteria is attributed to your skill (something within your control) and which is attributed to luck (something not within your control). For those criteria relying on luck, you must accept the possibilities that luck will turn her back against you and how you are able to handle it. The good news is that if you are right, you will earn a fortune (provided you put a significant amount of stake). You can read more about randomness in the post on Drunkard’s Walk and Fooled by Randomness (we are doing injustice to this great book by Nassim Taleb with a rather short summary. We will expand the post soon).

For limiting the role of luck, you can choose something safer with less volatility. A permanent portfolio and a life insurance policy are some apt examples. They compensate the lack of huge gains with certainty and less dependency on luck. One important point is that there is no way you can eliminate luck totally. Insurance companies and banks can collapse even though the investments you hold appear safe for now.

To end it off, I would like to talk about the role of perseverence – Perseverence may increase your exposure to luck. Just like the first story I shared in this post, my girlfriend’s perseverence in asking passer-bys for directions made us lucky. Salesmen who can handle rejections and carry on selling is more likely to succeed as compared to those who do not. Employees who are more eager to accept challenging tasks have higher chances of outperforming their peers. Investors/traders who learn about themselves and the markets have higher chances of becoming profitable.



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7 Comments
  • Jon
    Posted at 01:59h, 25 November Reply

    Hi,

    I just wanted to comment that perseverance will actually decrease your exposure to luck as perseverance will increase the number of observations and the greater the number of observations the more likely it is a person will obtain the mean result.

  • yeo
    Posted at 02:09h, 25 November Reply

    Nice article. i really like it and enlighten me..

  • David
    Posted at 14:49h, 25 November Reply

    hey this is your best post ever.

  • daniel
    Posted at 17:43h, 25 November Reply

    the law of probability applies, 80/20 is a good guide. to select something good there must be a sample pool to select from. a good salesman knows not all sales will be closed and not all closed sales will be big. nonetheless, he still needs to do his work to hunt for leads, as many as possible and narrow them down to a few and hopefully hit some big deals. a good trader does the same thing, filter through a lot of stocks and narrow them down to a few. not all trades are profitable and not all profitable trades are big. the filtering/selection/sales or trading process require skills. skills relevant to that industry. like to emphasize the word ‘process’ or method. yes some time things can get lucky and hit a big deal but a salesman will become a poor man when he depends on luck to knock on his door. an average salesman will reason it is luck when a top salesman receive his sales award. actually the average salesman does not know what the top salesman is doing differently. a top salesman’s routine is different from an average sales. luck will run out one day. to acquire a new skill it requires at least 10000hrs of practice according to research. to acquire a skill requires dedication, it’s persistence and discipline of perfecting a craft. food for thought: “keep trying”

  • Trading Educator
    Posted at 11:14h, 26 November Reply

    Alvin, I recommend that you read this book “The Education of Millionaires” by Michael Ellsberg. I often asked myself this question as well. Why do some mediocre people get promote so fast? And I found the answer in this book.

    To become successful in life, we need to master the skill of success. The skill of success breaks down into 3 things. The skill of marketing, the skill of sales, and the skill of leadership

    Skill of marketing is the ability to get people who don’t know about you to know about you. If you can get people who don’t know about you, or your service or your company, to become aware of you, then you are successful in marketing.

    Sales is the ability to take someone who knows you but who has never given you money, and turn them into someone who knows you and who is also giving you money.

    Leadership is not about control people, it is the ability to influence people.

  • Troy
    Posted at 00:53h, 13 December Reply

    Just sharing a different perspective, not one I totally agree with. I once asked a fighter pilot whether he would rather be lucky or good (skillful). His reply was “Lucky”. You see, as an investor, I would rather be good, because being lucky may mean that I win a big payoff once and never repeat it again, while being good means I can keep earning and earning because of my skill. It is repeatable and predictable. But as a fighter pilot, no matter how good you are, if you are unlucky once, you are dead.

    • Alvin
      Posted at 05:12h, 16 December Reply

      Maybe the post is skewed towards luck. But I am not saying skill is not required for success. In fact, skills may increase the success rate as luck is more likely to find a skillful person than one who is not. My point is skill alone is not enough to guarantee success. A skillful pilot can also be unlucky and end up dead too.

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