Luck Vs Skill In Investing
There was an article I read this morning that made me think about the dynamic of luck vs skill in investing. The article title was "Investors Double Down on Stocks, Pushing Margin Debt to Record." It was an unflattering article title and even more unflattering protagonists. In the article, Michael Wursthorn talks about two regular people, one who is a civil engineer named Bruce Burnworth and another a chemicals-distribution business owner named Mary Roberts.
Both of these investors turned tens of thousands of dollars into 7 digits by investing in Tesla via margin and options. Understandably so, these investors have done well, and deserve their fair share of praise no matter the manner in which the money was made.
But it ultimately begs the question, was this luck or skill?
In the world of probabilities like the one we are all involved in - investing/trading, it's hard to know how much of it was skill vs luck, at least not at first glance.
The Tesla example illustrated by WSJ is just one of many we can point out in the current raging bull market. Was it skill or luck that people who bought Tesla went up as much as they did? Were there fundamental prospects that could determine the potential outcome of the scenario? Are they backed by data and facts? Is the stock market valuation supportive of ~$600+ billion valuations?
We will never truly know the answer until there's more time that has gone by. Like golf when an average Joe beats Tiger Woods on one golf hole, or a random college kid hits a forehand winner on Roger Federer, or a runner running a slightly faster mile split than Eliud Kipchoge, greatness and skill should be measured on a longer time horizon.Â
Time is the differentiator between luck and skill. The longer someone can do something successfully and do it repeatedly, the more skilled they are. That's why tennis tournaments last 1 to 2-weeks (for tennis majors), that's why golf tournaments are played over 4 days, and that's why marathons are 26.2 miles. Similar to games of chance and endurance, true skills are only really demonstrated over a long period of time, and even if a winner emerges, the winner is tested again and again in future events to see if they are truly skilled.
This is why I always remember the quote Phil Jackson said to the Chicago Bulls:
You're only a success for the moment that you complete a successful act.
And just like investing and trading, skill comes from the notion that you can repeat a successful act. Although in the game of chance, you will have bad and good trades (just like the fact that Michael Jordan wasn't 100/100 in shooting percentage), but it's how you rebound from bad trades, and how you think through good trades/investments that will ultimately define you.
Blurry Lines - Stick to the Process
My personal philosophy from the days I used to play tennis, and now play golf and train for a marathon is this -Â it all comes down to process. Investing is no different than competitive sports. Everything is boiled down to process, and the more attuned your process is, the more you can repeat the success, and the more you can repeat your success, the more skilled you become.Â
At the end of the day, being grounded with your mindset that you will have good and bad days, and you will see your process tried and tested needs to be front and centered in your mind. Ask yourself, how is my process? Is this a fundamentally sound process? If so, how can I improve my process so I can get better?
Only when we focus on the process rather than the result, can we truly figure out whether we are lucky or skilled. So as much as this is about how a tech bubble has enriched the lucky, it is also a lesson to those that are process-oriented - do not be discouraged. Always focus on the process and improve on the fundamentals. If this can be our driving force in the field of investing or in life, the sky is the limit.