The Taboo of Luck
Why Luck plays as important a role as do Skills
“One lucky break, or one supremely shrewd decision—can we tell them apart? Not easily.” - Benjamin Graham on his GEICO Investment’s Stellar Success
‘Luck’ occupies a very intriguing place in our lives. It is often referred to when we look at others’ success and often ignored when we look at our own. It also feels good to say “I’m good at my job” compared to “I’m lucky” or “I got lucky”. The former boosts our self-confidence and the latter makes us cringe.
But if you were to look at all events that had to take place to get you where you are, you would realize the umpteen times that luck played its part. In no way does this take away the skills you possess, but it is humbling to admit one’s good fortune too.
For instance, my first job in Dubai was with Citibank Wealth Management Team in September 2005. I didn’t even have a passport till May 2005 nor could I afford one in those days. We were neck-deep in loans as a family and I was keen on doing all I can to get out of the mess. On a random Saturday, I made a CV and sent it out to 100 placement agencies to just check my worth in the job market. “For Fun” sake, I added a line in my email ‘Only looking for International Placements’. It was random, without any thought or planning, and with no guidance from anyone. Just a shot in the dark.
And as luck would have it, I got a call in a few weeks’ time for placements in Dubai with Citibank. I gave the interview and I think I bombed big time. I wasn’t clear in my thinking and I was sure about getting rejected. How could I think of being selected if the interview didn’t even last 5 mins and ended with very few questions from the interviewer?
Hence, when I got the call that I have been selected, I couldn’t digest the news. It was surreal, out of the blue, and life-changing in so many ways. My income was going to be 5X of my salary in Mumbai and for the first time, I could see ourselves getting out of the debt burdens we were struggling with since I could remember. That was way back in 2005 and these 16 years have been a joy ride in Dubai across banks, industries, roles, friendships and so much more. But none of this would have happened if not for that email in 2005.
So the question remains - Should luck be attributed 100% of my success? Should Skill be attributed 100% of my success? Or is it in between?
“I was lucky to be in the right place at the right time. But many others were also in the same place. The difference was that I took action.” - Bill Gates
Admittedly, Bill Gates is a Genius and a deep thinker around the problems he is committed to solving. The Netflix documentary ‘Inside Bill’s Brain’ was exemplary and made me see the brilliance of Bill Gates as an Entrepreneur, Philanthropist, Visionary, and a Game Changer.
But when you go through his early childhood, you would find that he got to study in Lakeside High School, one of the only schools in the world in 1968 to have a computer. If his teacher, Bill Dougall, wouldn’t have insisted on the USD 3,000 computer, then there wouldn’t be a Microsoft - as stated by Bill Gates himself.
His stroke of luck continued later in life too. When IBM was launching PCs, they tried negotiating with Gary Kindall, owner of Control Programming for Microcomputers (CP/M), who had more than 80% market share for Operating Systems. But he did 2 mistakes that cost him dearly - (1) He wasn’t at home to personally negotiate with IBM over the licensing deal and had left his wife to do so (2) He tried to swing a huge license fee i.e. USD 200 + compared to MS-DOS with USD 40.
These 2 errors, called ‘errors’ only with hindsight bias, cost him the opportunity of a lifetime. Maybe we would be seeing Gary Kindall as the Billionaire Software Visionary instead of Bill Gates. The misfortune continued for Gary leading to a tragic untimely demise for him when he hit his head on a bar stand in a drunken brawl at a Biker’s Bar in 1994.
I am certain about the fact that Bill Gates played his cards very well and left an impact on the IBM Team with the presentation of his MS-DOS (Operating System). But he had no control over the choices Gary Kindall would make. And as history shows, good luck was on his side and MS-DOS went on to conquer the Software Business, turning itself into a multibillion-dollar juggernaut.
So the question again - Should luck be attributed 100% to the success of Microsoft? Should Skill be attributed 100% to the success of Microsoft? Or is it in between?
Ironically, luck doesn’t make for a good story. It’s the cousin that hogs the limelight i.e. skills. Most expressions around luck remain subdued but the symbolic expressions make up for good decoration items everywhere. You will see ‘Ganesha’ symbols or stickers almost everywhere in India, ‘Dream Catcher’ in the USA, ‘Maneki Neko’ in Japan, and ‘Laughing Buddha’ in Vietnam.
Everyone invites ‘good luck’ to grace their lives but no one outside knows if ‘luck’ actually visited. But when ‘bad luck’ arrives, the message is broadcasted to as many people as possible. Such is the irony of ‘Luck’.
The case that exemplifies the ‘bad luck’ being broadcasted worldwide is about the ‘Mona Lisa’ painting. For 300 years till 1911, Mona Lisa was not even considered amongst the Best 100 pieces from Versailles. Even Insurers had assigned it a value that was a mere fraction of paintings by Rafael and others. Until it was stolen by Vincenzo Peruggia as he believed that the painting deserved to be in Italy, the home of Leonardo Da Vinci.
What followed next was completely unpredictable. The news got covered by all publications. Every newspaper subscriber was reading something about Mona Lisa daily. Contemporary artists started creating Mona Lisa inspired works, some of which were very funny and went viral (shown below). Advertisers started launching Mona Lisa perfumes, cigarettes, pillow covers, tours, and the list goes on.
The artwork that wasn’t even considered worthwhile for three centuries, eventually caught the world’s attention. Few senior Louvre staff members even resigned out of embarrassment and pressure. In 1914, Vincenzo Peruggia got arrested in Italy and the painting was brought back to Louvre in France. The hype and euphoria of this retrieval were celebrated with a lot of fanfare with 1000s of people thronging the art gallery to get a glimpse of the painting.
The fascination for the painting continues even today. Today we have all kinds of memorabilia, songs, and references to the artwork. On being asked ‘Which is the most famous painting in the world?’, 85% of the respondents worldwide have answered ‘Mona Lisa’. Michael Mauboussin, Head of Consilient Research at Counterpoint Global, has even done back of the envelope calculations regarding the value of the Mona Lisa painting today. His estimates are around USD 2.5 billion today.
From a mere fraction of other paintings in 1911 to worth billions in USD. Should we refer to Leonardo da Vinci’s success to 100% skill? Or should we attribute his reputation to 100% Luck? Or yet again, a bit of both?
As Morgan Housel states “Luck and risk are both the reality that every outcome in life is guided by forces other than individual effort… they both happen because the world is too complex to allow 100% of your actions to dictate 100% of your outcomes. The accidental impact of actions outside of your control can be more consequential than the ones you consciously take.”
In Investing too, you are going to face events out of your control completely. And hence it is very important for you to understand its repercussions in your decision-making process.
When you start making investments because others are ganging up on the trade/launch/IPO/NFO, then you are pretty much relying on luck for the momentum to continue in your favor. As it did with AMC stock in the US. It shot up from USD 2 to USD 60 + in less than 7 months i.e. 2850%. It ain’t a Google or Apple in the making, it is a cinema chain, and that too weakened financially due to COVID lockdowns. And hence the craze around this stock was a perfect setup for future losses on the trade.
And if you entered around USD 60 in June 21, you would have seen your investment depreciate by 35% in less than 2 months. The shaded area shows the volumes in the stock around June. Now you have no strategy except for hoping that the momentum returns and the stock bounces back way higher than your cost of purchase. This is when you have deviated away from Skill, and relying solely on luck for earning your returns.
This is called ‘dumb money’ in our trade. You got to protect your hard-earned savings from turning into dumb money. There is mostly regret and grief in this investing style.
There is also a flipside. If you did read Wallstreet Bets on Reddit and bought into AMC around USD 2 as some did, then you would have all the reasons to celebrate the bumper profits on this trade. This is the good part. But the truth is that if getting lucky on this trade is perceived as a skill on your part, then you will be encouraged to make this kind of bet again. And the next time, the bet will be bigger, maybe with leverage and worse still, with a bigger chunk of your money. And chances are, that the bet may not go in your favor this time. Or your luck may have just dried out at a time when stakes are even higher.
This is exactly how bankruptcies or disruptions happen. I was reading Kaushal Dugarr’s tweet thread on the bankruptcy of the world’s largest tea producer. The reason for their downfall for massive expansion via acquisitions and lending to weaker group companies. Both these are a demonstration of skill-dependent bias, with no room left for dealing with “bad” luck when it comes home uninvited.
That is exactly what happened with the Assam floods and declining exports, coupled with rising labor costs. Suddenly, the company has run out of reserves and has to sell tea estates to partially settle the loan and carry out operations. When that also fell short of the cash needed for loan repayments, the company has been asked by officials to file for bankruptcy for the liquidation saga to begin.
Another gem in the dust, only because “luck” was completely forgotten and skill got all the limelight. This story repeats in all bankruptcies, failures, losses, wipeouts, and even disruptions. Hence you have to be careful with where you make investments. You need to have a checklist in place that acts as a guard rail that will protect you from getting seduced into juicy profit-making fantasies. You need a system in place where “NO” is the only answer for an option that doesn’t fit your criteria of investing.
You need to be clear about the questions you need to answer before you say “YEAH”. I will share with you a few basic ones that I use -
Do I understand it or is it in the ‘too tough’ pile for me?
Does it help me in meeting my goals without significant risk?
What is the worst that can happen?
Am I prepared to handle the worst if it was to happen?
Does it need to be done now or can it wait? If it is a significant chunk and it can wait, then sleep over it. If it is insignificant a chunk, then can take a call now itself. If it is a significant amount and needs to be decided upon now, then let it pass. Big decisions rarely work out when rushed into.
What is my exposure to it? Is it within the limits set for this particular investment/asset class?
Does it leave enough cash as a buffer for adversities or emergencies?
Do I trust the people I am dealing with?
Is my trust preceded by my emotional comfort with them or is it their performance and reputation/reference?
Do I understand their investment process and ideology for decision-making?
Are they humble enough or beaming with overconfidence? If it’s the latter, say NO. If it’s former, then only consider.
I got a call on Thursday from my Relationship Manager, suggesting me to buy a near-term call option and activate my dormant derivatives trading account. My checklist flashed in front of me and the 1st criteria itself wasn’t met i.e. do I understand the company or the product or the proposition being offered? NO was my answer to him. I could feel that he didn’t like it but I ain’t investing to please others. I am investing only to satisfy my goals, not even me, just my goals.
And my goals need me to be -
prudent
patient
knowledgeable
Prudence leaves me enough buffer for bad luck. Patience allows me enough time for the decisions to work out. Knowledge allows me to make wise decisions. This is my trinity of mental frameworks to help me deal with “bad luck”, while I keep my arms open to embrace “good luck” when it arrives.
“If you are in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.” —Warren Buffett
And if you do get incredibly lucky, do extend your support to as many people as you can. Everyone doesn’t get enough “luck” over their entire lives, maybe you are the one who opens the floodgates for them. Just like the placement agency opened it up for me by answering my email in 2005 🙏🏻
Wishing you loads of luck and happiness ahead 🤗
Recommendations for the week #
Netflix isn’t the most successful Streaming business only because of its technology. It occupies the pole position firstly because of its phenomenal culture. I bumped into this 2009 Slide Deck by Reed Hastings and it blew my mind. I can only wish that every entrepreneur, team leader, business owner, and creator should go through this deck to understand what leadership actually refers to.
Yesterday, we launched Episode 8 of our podcast ‘Better Bets’. We cover the topic of ‘assets’ and differentiate between its many formats. We still haven’t got consistent with our recording cadence but we intend to put that in place too.