The more time I spend watching investing in the stock market, the more I become aware that there is always one factor working in the background we cannot overlook.
This factor may be ignored by many investors, as it is an uncomfortable truth. Acknowledging that this impacts investment outcomes can be difficult, but ignoring it altogether can lead to worse results.
The factort I am referring to is luck. Luck plays a huge part in the investment world. Sometimes companies are lucky, strinking gold where they are looking. Sometimes they manage to agree on a transformational finance agreement, and sometimes they may stumble upon a revolutionary technology.
When I use the word luck, I am referring to factors that may be difficult to explain with logic alone. Sometimes it is just the case of being in the right place at the right time.
In the case of Moderna Inc. (MRNA, Financial), it was lucky enough to be researching an important technology just when a global pandemic broke out. It could have taken a decade for the company's technology to make it through all the essential approvals processes in a typical environment. In the span of less than 18 months, the company was catapulted from being an early-stage biotech to one of the most important medical companies in the world. Luck had a huge role to play.
Being lucky is not something investors should take for granted. Luck is an integral part of the investment process, but by understanding this we can take advantage of favorable or lucky outcomes.
Sometimes investors are lucky
One truth about investing is that no investor will ever be correct 100% of the time. There will always be losses. Dealing with these losses correctly is what separates a good investor from a bad one.
Luck will almost certainly play a role in companies' fortunes. Investors should accept this fact of investing. Sometimes an opportunity will not work out because the business will miss out. That is an unlucky scenario. Sometimes a company will get lucky and, like Moderna, be in the right place at the right time.
Investors need to acknowledge and accept this. They should let successful or lucky companies rise to the top, and unsuccessful companies fall to the bottom or be cut. Put simply, this is cutting losses and running winners, but acknowledging at the same time that there always will be factors in a company's success story that cannot be explained by pure logic alone.
At the same time, investors need to realize that in some sectors, luck plays a huge role in whether or not a business will be successful. Biotechnology is an example. Sometimes even the most researched treatments just don't work, while they do at other times.
In the oil and gas market, some lucky companies have managed to make a success out of prospects other businesses might have abandoned. The same goes for precious metals explorers. And in technology, how many social networks existed before Facebook Inc. (FB, Financial)? The company was just in the right place at the right time.
By acknowledging that luck will always play a role, investors should be able to refine their position sizing approaches. It may also help growth investors develop an approach for dealing with speculative companies. For investors who don't deal with speculative enterprises, acknowledging luck's role can help explain the unexplainable. However, it should never be used as an investment thesis by itself.
There is always going to be an element of luck present in an investment opportunity, and that means there is always going could be a level of risk. Investors should be aware and prepare for this.
