Investing is it luck or skill?
Investing, especially over relatively long periods of time, is much more a matter ofskill than of luck. Investing is often viewed by many and the financial media as more luck than skill, because in the short-term, feedback loops are often unclear and inconsistent and can be very volatile
Over the last few years, many new investors have entered financial markets lulled by the promises of making "easy money", "quick returns" etc. Investing involves both luck and skill and when you are on a roll, unfortunately most believe success to be a function of your skill. Is there a way to gauge if investment returns are more luck or skill?
From time to time, we contemplate deeply about thedrivers behind our own investing performanceand sometimes that of others (so we know who is worth learning from), so as to determineif one’s out-performance is attributed more to skill or luck.
Luck
Luck is a chance occurrencethat affects a person or a group. Itcan be good or bad.But luck isout of one’s controland isunpredictable. Scores of games where luck is significant, then becomes an imprecise measure.
Luck is something by chance. Means you have nocontrolover it. It happens and impacts everyone. You say you “your bad luck”, because, it impacted you and your loss is most important in priority.
Play afair coin toss, and there’s a50–50 chance of heads and tailseach time with thesame loss/gain payoff.Each toss is an independent outcome that operates at the individual level.
Skill
Skillis best defined as a one’s ability to use their knowledge effectively and readily in execution or performance.Skill can be acquiredthrough thedeliberate practiceofphysical or cognitive tasks.
The skill is your inputs. Your efforts that you put.They may change your investments but events are bound to happen. Efforts may change or cover your investments.
There are typically Three Stages of Acquiring aSkill
1. Cognitive stage:You try to understand the activity and you make a lot of errors. It is generally the shortest.
2. Associative stage:Your performance improves noticeably and you make fewer errors that are more easily corrected.
3. Autonomous stage:The skill becomes habitual and fluid.
Improving a Skill usually boils down to deliberate practice.
1. Repetition:It involves hours of concentrated and dedicated repetition.
2. Feedback:Deliberate practice also requires timely and accurate feedback.
3. Effort:Deliberate practice is laborious, time-consuming, and not much fun, which is why so few people become true experts or true champions.
So, simply put, efforts are in your control. Luck is out of bounds.
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Investing: Skill vsLuck
That is also, why we are of the following view that:
1.Investing, especially over relativelyshortperiods of time, ismuch morea matter ofluckthan ofskill.
2.Investing, especially over relativelylongperiods of time, ismuch morea matter ofskillthan ofluck.
Investing is often viewed by many and the financial media as more luck than skill, becausein the short-term, feedback loops are often unclear and inconsistent and can be very volatile.
"Risk hai toh ishq hai" etc. sounds fun on TV, but quitting a job and joining full-time markets works out for very few, if at all. Enjoy the spoils of the market, but don't let the giddy returns go up your head.
"Once the true relationship between inflation and unemployment is understood, with luck and skill, a free lunch is possible." —Paul Ormerod
Thank you.
