Why You Can’t Control Everything
When it comes to investing, we like to think that success is primarily a result of skill, strategy, and meticulous research. While these elements certainly play a significant role, one factor that often goes overlooked is luck. It’s uncomfortable to admit, but luck—whether good or bad—can have a profound impact on your investment outcomes. No matter how much analysis or foresight you apply, there are always elements outside of your control.
In this article, we’ll explore the role of luck in investing, why it’s important to acknowledge it, and how recognizing the influence of randomness can lead to better decision-making and risk management.
1. Luck and Timing: The Unseen Forces at Play
One of the most obvious ways luck shows up in investing is through timing. You can have the most carefully constructed portfolio or make a sound investment in a high-quality company, but sometimes the timing of your entry and exit is dictated more by luck than by skill.
For example, if you invested heavily in stocks just before the global financial crisis in 2008, even the best companies would have dragged your portfolio down as the market tanked. On the flip side, if you happened to invest in early 2009—at the market bottom—your portfolio would have enjoyed substantial gains as the market rebounded.
In both cases, the fundamentals of the companies might have been the same, but your returns were drastically impacted by the timing of your investment, which is often outside your control.
Key Takeaway: Timing plays a significant role in your investment results, and no one can perfectly predict market movements. Recognize the role of luck and focus on long-term investing to smooth out the effects of short-term market fluctuations.
2. Survivorship Bias: Why We Only Hear the Success Stories
In the world of investing, we are inundated with stories of investors who hit it big by picking the right stock at the right time. Whether it’s tech giants like Apple and Amazon or cryptocurrencies like Bitcoin, success stories are everywhere. However, what we rarely hear about are the countless others who made similar bets but failed.
This phenomenon is known as survivorship bias. We tend to focus on the winners and attribute their success to skill, while ignoring the many who didn’t make it. The reality is that for every investor who struck gold, there were likely many more who lost money on similar gambles. Luck played a significant role in who succeeded and who didn’t.
Key Takeaway: Be wary of survivor stories and the temptation to think you can replicate someone else’s success. Always remember that for every success story, there are untold stories of failure—often due to bad luck rather than bad strategy.
3. Black Swan Events: The Unexpected That Changes Everything
Black swan events are rare and unpredictable occurrences that have a massive impact on the markets—think of events like the 9/11 attacks, the COVID-19 pandemic, or the 2008 financial crisis. These events can derail even the most carefully planned investment strategy, and no amount of research or analysis can predict them with certainty.
While we may not be able to predict or control black swan events, they are a reminder that luck and randomness can significantly impact investment outcomes. Even seasoned investors and professionals were caught off guard by these events, which reshaped markets in ways no one could foresee.
Key Takeaway: Understand that black swan events are part of the investment landscape. You can’t predict them, but you can prepare for them by maintaining a diversified portfolio and avoiding overexposure to any one asset or sector.
4. The Role of Luck in Company Performance
Even within the companies you invest in, luck plays a bigger role than many people realize. While strong leadership, innovative products, and competitive advantages are critical to a company’s success, external factors can shape a company’s fate in ways that management and investors cannot control.
Consider companies that were well-positioned but stumbled due to unexpected regulatory changes, natural disasters, or shifts in consumer behavior. Or think about how much luck played into the rise of giants like Amazon, where a combination of Jeff Bezos’ vision and being in the right market at the right time led to meteoric success. Many other businesses with equally strong ideas and leadership simply didn’t have the same fortune.
Key Takeaway: Even with the best analysis, company success is often influenced by factors beyond anyone’s control. Luck plays a role in a company’s ability to navigate external challenges and capitalize on opportunities.
5. Recognizing Luck Helps Manage Risk
Acknowledging the role of luck in investing can help you manage risk more effectively. When you recognize that not everything is within your control, you’re less likely to make overconfident decisions or assume that past success guarantees future results. Understanding that randomness plays a part can encourage you to diversify your investments, stay humble about your successes, and avoid putting too much of your portfolio into any one bet.
By focusing on the factors you can control—such as diversification, cost management, and aligning your investments with your goals—you can protect yourself from the worst effects of bad luck while positioning yourself to benefit from good fortune when it comes your way.
Key Takeaway: Recognizing the role of luck should encourage humility and thoughtful risk management. It can remind you to diversify, maintain a long-term perspective, and avoid overconfidence.
6. The Importance of Patience and Time in Reducing the Impact of Luck
While luck plays a significant role in short-term investment results, its impact diminishes over the long term. The longer you stay invested, the more your returns are driven by the fundamental performance of the companies or assets you own, rather than by random fluctuations.
This is why time in the market is often more important than timing the market. Trying to predict when to buy or sell based on short-term movements is fraught with luck, but long-term investors who hold through market cycles can reduce the influence of randomness and capitalize on the market’s general upward trend.
Key Takeaway: The longer your investment horizon, the less luck will influence your overall results. Patience and time help smooth out the effects of randomness, allowing the fundamentals to drive your returns.
7. Don’t Attribute All Success or Failure to Skill
One of the dangers of not recognizing luck is the tendency to attribute all your investment successes or failures to your own skill (or lack thereof). When things go well, it’s easy to take credit for having made the right decisions. When things go poorly, it’s tempting to blame yourself for missing something.
In reality, luck plays a role in both success and failure. By acknowledging this, you can maintain a balanced perspective. You won’t become overconfident after a string of good returns, and you won’t be too hard on yourself when investments don’t go your way. Recognizing the role of luck allows you to stay grounded and focus on improving your process over time.
Key Takeaway: Success in investing is a mix of skill and luck. Stay humble in victory and resilient in defeat, and focus on refining your investment process rather than attributing all outcomes to your abilities.
8. How to Factor Luck into Your Investment Strategy
While you can’t control luck, you can incorporate an understanding of its role into your strategy. Here’s how:
- Diversify: Don’t put all your eggs in one basket. Spread your investments across different assets, sectors, and geographies to reduce the impact of any one piece of bad luck.
- Stay disciplined: Stick to your long-term strategy rather than making impulsive decisions based on short-term market movements or recent events.
- Manage risk: Allocate your investments according to your risk tolerance. This way, you’ll be better prepared to weather bad luck when it inevitably strikes.
- Rebalance regularly: Periodically adjust your portfolio to ensure you’re not overexposed to any one asset class or sector, which could be hit by unexpected events.
- Maintain humility: Recognize that not all success is due to skill, and not all failure is due to poor judgment. Stay focused on continuous improvement.
Final Thoughts: Embrace Luck but Don’t Rely on It
Luck is an undeniable force in investing, and it can be humbling to realize just how much it affects your outcomes. However, while you can’t control the role of luck, you can control how you respond to it. By recognizing that randomness plays a part in the markets, you can make smarter, more measured decisions that improve your odds of success over time.
Rather than trying to eliminate luck from the equation, embrace it as part of the investing process—focus on the fundamentals, manage risk, and maintain a long-term view. That way, you’ll be well-positioned to benefit when luck is on your side and resilient enough to recover when it isn’t.
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