Aug. 7, 2019
Delphine Govender tweeted a great comment from Daniel Crosby about the role of luck in investing, or trading.
Never a truer word by @danielcrosby. The role of luck; market sentiment leads us as investors & our clients to think we were right because of the outcome; when being right in investing is about basis for the investment decision turning out correct (more than less). pic.twitter.com/qESB66vBqL
— Delphine Govender (@Delphine_DG) August 4, 2019
Truth is when luck strikes we claim it as skill, when it really was just pure good luck. Now don't get me wrong, when luck strikes - grab it with both hands.
But the problem is that by claiming luck as skill we skew out actual ability claiming credit where it's not due and as such we think we're better than we actually are and the problem here is glaring.
So in short when we're dissecting an investment we need to ask the question about how much of the return was luck vs. how much was skill. Now sure this isn't easy, but if we're honest with ourselves we certainly can spot luck and we need to admit as such.
Personally I know I had two very lucky trades. My first purchase in October 1987 (DiData) and Capitec* (JSE code: CPI). The former I was actually trying to buy another stock and the latter was more a purchase in anger as I had missed my preferred entry price and it just kept on moving higher. These two transform my portfolio returns, without them I still beat the market - but by a lot less.
So how did we spot that luck?
None of this is rocket science to spot, you had reasons for buying. You list them (you do write down your research?) and then something comes out of left field to boost profits?
The flip side of course is bad luck, and sure that happens as well. So we also need to dissect bad luck. How much did it hurt but also do we keep on experiencing bad luck? If yes, maybe it's less about bad luck and more about lack of skill which we're blaming on bad luck because that's easier? Maybe we're just not very good at figuring out the risks?
I have long stated that the only book by Nassim Nicholas Taleb worth reading is Fooled by Randomness as it goes deep into the role of luck in investing, trading and life. Read it.
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