What role does luck pay in investment success?

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Whether you are a seasoned investor or someone who is just figuring out how to put their money into the investment market, there is always some form of unpredictability that causes you to think twice before making the commitment.

Similar to the way that payday loan lenders choose whether or not to put their money into the hands of their applicants, an investor should be looking out for a reputable company to invest in. This can be done by looking back at their previous performance to other forms of stock market analysis. Finance experts have even said that the process of buying high stocks and selling low ones costs investors 1% of their annual returns, which can be quite a sizeable amount. But, aside from the research, how much of a role does gut instinct and luck play when it comes to successfully investing in a company and their ability to earn you the fortune you are looking for?

Firstly, let us consider the fact that betting on a company that is continuously successful does not work in an investment situation. Betting on a success story is ideal for many other fields, for example in chess. Betting on a consistently well performing chess player is a safe bet as the game takes skill and the results work in correlation to that. Luck counts for very little when the champion chess player knows the tricks of the game and has years of experience in their game.

Luck is, alternatively, very important when it comes to casino card games like blackjack and poker. These games require skill to a certain degree but you cannot really every predict the final outcome of how the game and hand will play out – this is where luck comes in. Similarly, in business ventures luck plays a huge role as you have the theory of the business strategy on one side of the coin and then the external factors that are uncontrolled on the other.

Many investors argue that luck is indeed an important factor when it comes to investing. While investors themselves are knowledgeable and able to incorporate their understanding of the marketplace into stock market prices, it is luck that plays a decisive role in determining the outcome. An investor works in the same way a parent would with raising a child; their knowledge is passed on to the types of investments they make but ultimately, the investment will have to run the course on its own (as a child becoming an adult will make independent choices).

Through focusing on the process you apply to your investments, you are able to ensure that luck is better aimed your way in making the market move in your favour. Here are some of the ways in which you can nurture your investment process to work alongside luck to create the ultimate outcomes…

  • Check to see whether the process looks at the problem of behavioural bias such as overconfidence etc.
  • Check to see whether the structure of the organisation favours focusing their return for the benefit of investors.

The fine balance between luck and skill is a tricky one to master and it can lend itself to failure, regardless of how experienced you are. However, that is not to say that by trialling your approach to making investments that you will not be able to find the right way of achieving the skill-luck balance that works for you.

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