Luck vs. Skill
"I'd rather be lucky than good."
I understand the meaning behind the statement. I just don't get why we'd rather be lucky than good, especially when it comes to investing.
Yes, luck plays a part in most of our lives. I am lucky to have met my wife. Okay, very lucky. I am lucky to be blessed with five kids. Also very lucky. On the other hand, being lucky doesn't automatically make me a good husband, nor does being lucky make me a good father, either. These are skills we have to work at.
On the golf course, I'm pretty good. I have some skill - I happen to be a scratch golfer. I'm not a Tour player but among us mere mortals, I'd say I'm better than most. Yes, I get my share of good luck on the course, no doubt. And I didn't become a scratch golfer because I was lucky. It happened because I practiced, and spent hours and hours working on my skill.
My wife, on the other hand, is an average golfer - mostly because she plays a few times a year. I would also consider her very lucky. On skill alone, she will beat me a small fraction of the time. Okay, maybe never because she never practices and rarely plays. And she won't beat me because I say so, but because my skill set is better than hers - even when she gets supremely lucky.
My point: being good, or having a skill, will beat luck way more often than not. Because luck is not a skill.
So what does this have to do with investing? Let's see.
The Next Big Company vs. A Diversified Portfolio
Investing in the next big company - luck or skill? I say lucky. We have a better than average chance our initial investment WILL NOT grow to an amount large enough for us to retire. And if it does, that's pretty lucky. Like "winning the lottery" lucky.
Investing in a diversified portfolio - luck or skill? I say skill. It takes skill to create a diversified portfolio. It also takes skill to continue to fund our investments. We also have to rebalance our portfolio (skill), and manage not only our asset allocation (skill) and risk tolerance (skill), but also our behavior (SKILL!!).
Okay, so now we've determined we want to be good, and not simply lucky. And when it comes to investing, we are constantly bombarded by the financial media about the stock market. Google "hot stocks to buy now". I'll wait…
The results? Merely predictions. And predictions, if they're right, are lucky.
We don’t know with any certainty that any of the "hot stocks" will actually be "hot". They could be duds, which would be a dagger for our portfolio. Sure, it would be great if someone could predict the future but I've yet to meet someone who can.
Okay, fine. I hear you saying to yourself, "Being lucky is fun, it's exciting!!"
I agree! Luck creates AMAZING stories. The kind of stories you want to tell everyone about, and sometimes twice. And in turn good luck feeds our ego. Like, REALLY feeds our ego. Which means we might begin to confuse our good luck with skill.
This is a recipe for investing disaster.
Being good, or having skill, on the other hand? Not as much fun. It takes time, patience, practice, discipline. Maybe it feels a bit like work. Maybe we could even call it boring. My wife describes me as a boring golfer. It's not exciting, not full of flair or (or much) adventure. I hit most fairways, generally have a lot of birdie putts during a round. My score is generally around par, which is a great score. Yawn, so boring.
My wife would love to have a "boring" round of golf like I play!
In the end, let's not confuse luck with skill. Sure, some of the "hot stocks" you googled might do pretty well. And if you happen to hit one right, just remember it's luck. Not a predictive skill.
So instead of leaning on Lady Luck, take the boring route.
Invest in a Diversified Portfolio.
Be good at it, develop skill.
And if you can't or don't want to do it, find a Coach.
(hint: this is your cue to call me!)