The Harder You Work, the Luckier You Get

Investors tend to believe that positive investing results are due to special skill and insight, while negative results are primarily due to bad luck. The reality is that luck — both good and bad — plays a much more significant role in investing than many realize.

While you can't control luck, the best traders and investors find ways to put themselves in a position where bad luck isn't as painful and good luck can be leveraged. The old saying "the harder I work, the luckier I get" works very well in trading and investing.

Simply recognizing how much luck is involved in investing can lead to improved outcomes. Unlike most endeavors, where effort directly correlates with results, the stock market operates differently. Extensive research and analysis don't guarantee positive outcomes, as investors are essentially betting on unpredictable future events. This unpredictability introduces a substantial luck factor.

Picture two investors years ago looking for a good stock to buy and hold. One buys Apple, and the other buys Enron. At the time, they both conducted extensive research, studied all available information, and felt confident in their choices. One made a fortune, while the other saw their stock go to zero. Was one of these investors more skillful than the other? To what degree was the outcome simply a matter of luck?

Investors often underestimate luck's influence, particularly when experiencing positive results. They tend to attribute successes to skill and failures to bad luck. However, luck is impartial, affecting outcomes both positively and negatively. It's crucial to understand that good results don't always indicate sound decision-making, and poor results don't necessarily stem from bad decisions. Even skilled investors can make excellent choices yet face unfavorable outcomes.

To effectively deal with luck in investing, acknowledge its prevalence and regularly expect both good and bad luck. This mindset prepares you for unexpected events and helps you maintain composure during market volatility.

Develop strategies to withstand bad luck. Diversification by both time frames and individual stocks is key to protecting against unexpected downturns. Avoid disproportionately large positions to balance potential gains and losses.

Focus on tangible factors that genuinely influence outcomes, such as timing, risk management, and market conditions. Analyze how luck affects your results to understand better and improve your investment process.

Investing falls on a skill-luck continuum, leaning more toward luck than pure skill-based activities like chess. This is evident in the average batting average for long positions among skilled managers, which is only slightly better than random at 51%. When focusing on positions with forecasted positive returns, however, the batting average increases to 58%, indicating that there is some skill involved in investment forecasting.

Create an environment that allows your skill to manifest over numerous investments and an extended period. Protect your downside and neutralize non-skill factors like market and exposure to events like earnings reports.

Study others' investments critically, considering how much of their outcomes were due to skill versus lucky circumstances. By acknowledging and understanding luck's role in investing, you can develop strategies to manage its impact and improve your chances of achieving superior returns over time.

Embrace the fact that both good and bad luck are inevitable. This mindset will help you avoid overconfidence during successful periods and maintain composure during market volatility.

It is better to be lucky than good, but if you are good, then you are more likely to have more luck.

At the time of publication, DePorre had no position in any security mentioned.