My neighbor visited me yesterday. He saw me in some zee business show and then caught me reading a book, outside my house. Till then he did not know that I am a financial planner.
He came up with the same question which normally people ask in a bull market like now a day, Where to Invest, should we continue investing or Book Profits? He was a middle-aged man in his early 40s, but among the first-time investors entered the equity markets in March 2020…post the big Fall.
No points for guessing that there was “Balle-Balle” going on in his portfolio.
I asked him his philosophy of selecting the stocks and funds, and he explained to me all the valuation factors, expected potential, business understanding, fund managers track record, and whatnot.
So, what do you think…are you skilled or just lucky, to have gained so much of return? Can you say at this moment that you have learned the process of selecting “Good Stocks”? I questioned him. He was quite amazed at my question and replied very frankly that if he knew this, why would he be meeting me for his portfolio Review.
But that was him. It’s not easy for people to accept that their good fortune is due to luck.
In the last 10 months, I have spoken to many people who have “learned” the mantra to select Good “High Paying” investments. They have started following many PMS managers on Twitter, subscribed to some blogs sharing stock research, following Youtubers sharing investment tips, and with this, also have learned to speak the language of Economic times.
In all this, the one product that always bear the brunt and comes into comparison is the mutual fund.
With the transparency and easy availability of the data, along with many research software and websites, leave aside PMS houses, but even investors have started questioning the decision of the fund Managers.
When a New Investor says, “Prashant Jain ko SBI nahi lena chahiye tha”, I would say…Wow, you know so much, you deserve to be a Fund manager.
Coming back to the question of Luck and Skill, I would say the decisions could be based on skill, but results are always based on luck. And your skills also depend on how lucky you are.
Skill is the choice you make, the decisions you take in those circumstances, the preparedness you have to manage the risk side of it.
Don’t you think luck has played a big role in all the happenings in your life. Your parents were not your choice, the school where you laid the foundation of your education was not your selection, many people are not even so lucky to have even seen the school.
You hear stories of many people being dropouts from their school, and now doing well in their life.
Yours doing well in your job and in business also depends on lot many factors which are not in your control and direct influence. Though you feel that you are the one who’s controlling it (By labelling Hard work or Smart work to it) but actually you are not. Yours having a Good lifestyle, Loving spouse, Healthy Parents …what is all this? Yes, I know you have also played some role in it, but still.
Your selection in Good College was luck (of course supported by your skill), Your promotion in Job was luck (backed by your skill), Your ability to invest in the stock market when people were worried about their jobs itself was a piece of luck, Markets bouncing back when it was difficult to see what lies ahead was also proved lucky for you.
Problem would arise when you start confusing Luck for Skill and get into overconfidence that you know how to play, without knowing and following the rules of the game.
Luck helps those who have Skill, but if you have skill does not mean that you would be lucky. As when an opportunity pans out a skilled person would be in a better position to take advantage of the same but being skilled does not always lead to attracting the opportunity, and take advantage of the same.
Take the example of active fund management. We have seen in past years many active fund managers have not been able to outperform the benchmark which is the major and only expectation from any active management, but that does not mean that the fund managers are less skilled.
In fact, they have gained more skill in these years, by experiencing new developments, understanding the market movements and upgrading them, etc. But they were not alone.
Almost everyone in the financial industry (Fund managers, PMS managers, Stockbrokers, Institutions, etc.) have gained more skills, and all have been researching the same set of stocks so whenever any opportunity comes, all want to take advantage, which nullifies the Luck factor for many.
And this is also true that Fund Managers who do not respect the role of chance in their investment performance end up being stubborn and arrogant. This is where the role of a good and healthy Investment process and Critical Review model comes into the scene.
Only a Skilled person be able to put in those efforts to design a Structured and Flexible Investment Process. Flexibility is all about accepting that what we are doing may not be right and as per new circumstances we need to amend our ways.
There are some days few got lucky and then they start running their marketing campaign based on those lucky numbers and promote how skillful they are to have beaten the benchmarks, category, other mutual funds, and PMS schemes. Aptitude is hard to assess — all the marketing and investment pitches will be extremely polished and sound extremely smart.
And here your skill comes into play to understand their luck, and if you can’t, and get sold to their pitch, then this could be your “Bad luck”.
Luck is a Skill
When you understand and accept the fact that the outcomes are always based on Chance and luck, and what in your hand is intention and efforts, you try and gain more skills to be better, in working out the process and setting rules of the game, so the chances of being lucky goes high.
Let’s take the example of the Financial Planning process. It requires you to maintain the emergency fund, so you stay lucky by not being under immediate burden when you face any financial uncertainty in life, but those who don’t maintain such liquidity always feel that they are unlucky to have experienced health issues, job loss, some major repairs when they are not prepared.
When Sensex touched 50k one of my friends texted me that he was not lucky to have participated in this rise, but the truth was he had chosen EMIs over SIP 5 years back, which leaves him not much of a surplus to invest. So, it was all choice.
Luck is when preparation meets opportunity. And preparation takes time. It does not happen overnight. Some may be happy to have invested Rs 5 lakh in March and some have been saving for many years and have accumulated Rs 50 lakh or 5 crores, which participated in this rise.
All aspects of the financial planning process are directed towards preparing you to participate in life fully to take advantage of luck as and when it comes in front of you.
You can invest with confidence if you have provided for and made arrangement to manage the visible risks, you can invest when you have adequate liquidity available with you, you can invest more if you feel secure in your job and thus keep upgrading yourself (yes this is also a part of Financial Planning. Luck can come from anywhere). You try and keep yourself healthy so your savings don’t get transferred to Hospitals and doctors and give you enough time for compounding.
The credit should be given to the process. But if you think that your investment success is due to your skill then this thought will not let you put the systems right, and you tend to compromise the basic financial hygiene of having a good foundation and keep taking chances and playing with your luck.
Human beings love a good narrative. When an investor makes an incredible investment or a company rises to dominate its market, everyone (including themselves) can’t wait to attach an origin story that explains how that success was achieved.
We love reading success stories and try to emulate the same actions in our life. In every success story, the role of chance gets no attention, due to the obvious reasons that victors don’t like to hear that their success was due to Luck. Rather everyone likes to think that their success was due to diligence, hard and smart work, and Skill.
The underestimation of luck results in a double standard — when we succeed, we attribute it to skill, but when we fail, we attribute it to bad luck. Opposite is also true – When others succeed we many times call it a luck and when they fail we question their skill.
This tendency does not let us learn from our mistakes. And if by any chance, a bad process results in a good outcome, then it reinforces our belief in that bad process going forward.
This means that when attempting to judge outcomes, being able to accurately differentiate between luck and skill is incredibly important.
And Remember it’s not easy. However, Skill help you lead to a Good Process and Good process results in Good Outcomes (Luck).
What do you think about luck and skill? Do share your views in the comments section below.