I'm a big believer in the role luck plays in success. When reading about famous investors and business people, and how they made their money and became successful, I am acutely aware that, while hard work is required to be successful, more often than not, luck also plays a significant part.
Luck and life
We cannot control luck or being lucky. Sometimes all it takes is being in the right place at the right time. However, we can move the odds of being lucky in our favor.
There are many things in life you can't control. In investing, there's virtually nothing you can control apart from your entry point and costs paid.
Once you're in a position, you have no control and luck takes over. Doing everything possible to minimize the chance that you will be unlucky is vital. That's the margin of safety principle at work. If you buy a stock with a deep enough margin of safety, you tilt the odds of being lucky in your favor.
From this perspective, investing and gambling have a lot in common. In both situations, when you are in a position, you are at the mercy of the market or the horse race. When you've made your bet, you cannot control the market or the race from that point on.
What differentiates professional gamblers from the average joe is discipline and strategy.
Professional gamblers know how much to risk on a particular bet, and never try to get their own back if they lose. They have a strategy and stick to it, realizing losing is part of the business. It's how you take your losses that define the difference between "professional" and "amateur" (and addict, but that's a topic for another day).
The same is undoubtedly true for professional, successful investors and traders. It's not about winning or losing, but about how you react after a loss/win. It's about sticking to your strategy.
Stick to a strategy
An integral part of this is position sizing. Taking large positions for bets where the risk/reward profile is most attractive ensures that when you are right, the payoff more than compensates for the previous (or future) mistakes.
Warren Buffett (Trades, Portfolio) has said many times that he attributes luck in no small part of his success over the years. This is true. Luckily, he has lived through one of the most significant economic expansions in history, where America has benefited disproportionately to the rest of the world. Buffett had no control over this boom. Luckily he was born in the U.S., in the right place at the right time.
Buffett has benefitted from luck, but he's also a highly skilled investor, and it is this skill that has enabled him to stand out over all these years.
I think one of the biggest misconceptions about Buffett is that he's never suffered a significant loss over his career. The fact is he has on more than one occasion suffered losses, but he's handled each one with the same discipline and diligence, selling the position and moving on. At the same time, he's kept his winners. Coca-Cola (KO, Financial) is by far Buffett's best-known holding. He has been holding this position for years, and it has generated tens of billions of dollars in profits.
Buffett understands the importance of luck and the randomness of markets. And by understanding these factors, he's been able to move the odds of success in his favor.
Markets are random and being a successful investor requires a degree of luck, which no investor can control. Yet by acknowledging the role of luck in your investing strategy, you can tilt the odds of "being lucky" in your favor.
Disclosure: The author owns no share mentioned.
