Four leaf clovers and pennies-on-the-sidewalk aside, it’s pretty tough to count on getting lucky. As an investor, this is a good thing to keep in mind.
Although we’d like to find causality between actions and outcomes, the sobering truth is that sometimes there’s none to be had. The universe is rife with randomness, and the world of investing is no exception. In his book Thinking, Fast and Slow, Nobel Laureate Daniel Kahneman uses the example of basketball to describes what he argues are “misperceptions of randomness”:
The “fact” that players occasionally acquire a hot hand is generally accepted by players, coaches and fans. The inference is irresistible: a player sinks three or four baskets in a row and you cannot help forming the causal judgment that this player is now hot, with a temporarily increased propensity to score.
Players on both teams adapt to this judgment—teammates are more likely to pass to the hot scorer and the defense is more likely to double-team. Analysis of thousands of sequences of shots led to a disappointment conclusion: there is no such thing as a hot hand in professional basketball, either in shooting form the field or scoring from the foul line.”
This is not meant to suggest that some players are not better shooters than others—but rather that sequences of successes and misses are random. Similarly, while some money managers and individual investors may be more skilled than others, it is difficult to measure if or how that translates into stock market gains.
We know, for example, that there is no certain way to beat the market in the short run. Even if you manage to do so, that doesn’t mean you’ll do it again. But the human brain is masterful at attaching meaning to everything it experiences and to weaving those meanings into a narrative of its choosing.
Morgan Housel made the fascinating observation that luck generates a “false feeling that you are in control, because you did something and then got the outcome you wanted. Which is terrible feedback if you’re trying to make good, repeatable long-term decisions.”