Sibling Rivalry: Risk & Luck
Risk and luck are siblings. Both are the reality that every outcome in life is guided by forces other than our own effort. They are proof of forces working outside of our own control that can influence and directly affect outcomes. Nobel-winning economist Robert Schiller was once asked what he wanted knew about investing that we cannot know. He replied, “The exact roll of luck in successful outcomes.”
This is an incredibly insightful response because everyone if pressed would agree that luck plays some role in financial success, but it is difficult to quantify luck and if one were to suggest another’s outcome was due primarily to luck it might be considered insulting. Failure can be equally abused, whether it is the run of the mill losing position, or total financial ruin.
Were investments not placed with sufficient due diligence?
Are wayward careers due to laziness?
Do businesses fail due to a lack of effort?
Sometimes, yes – of course it’s due to those factors, but how much is hard to know. Everything worth pursuing has less than 100% odds of succeeding and risk is the result of ending up on the unfortunate side of that equation. Just as with luck, the story gets too messy and complex if we try to pick apart how much of an outcome was conscious decision as opposed to simply being a risk.
After the bankruptcy of GM and subsequent re-issuing of stock my wife and I purchased shares of the NEW GM in the IPO. For years, the stock went sideways, never shooting up, never plummeting to our ruin. I lost interest, got tired of having money tied up in an underperforming asset and eventually sold it, probably years after I should have… all but one share that is. Was the investment a bad decision? In retrospect, probably, but given that moment in time, GM seemed well positioned to have growth and success given where it was starting from. Fast forward a decade and the changed landscape of all automotive manufacturers pursuing electric vehicles and GM is performing well and experiencing growth across the company. So the good news is our single remaining share is up a little under 140% since purchase. It’s possible this was a bad investment, but it’s also possible I made a good decision that had an 80% chance of making money, I just ended up on the unfortunate 20% side. Did I make a mistake, or did I just experience the reality of risk?
Spend anytime around investors and business leaders and you’ll notice a trend in truth-management. Someone else’s failure is almost certainly attributable to poor decision making, or a faulty understanding or errant process, while said business leader’s failures are usually chalked up to the dark side of risk, bad timing, or a black swan event – luck. Magazine covers celebrate the triumphant, often reckless investments of those whose journey ended successfully. We tend to study, evaluate and copy those who are successful saying, do what they did, and avoid those who lost out with lady-luck.
Famed investor Warren Buffett is famous for offering advice to the common investor along the lines of 'diversify, buy an S&P 500 ETF and never sell it.' He also has a few lesser-known quotes that recognize that concentration is the easiest way to build wealth, while diversification is the best way to maintain it. Countless fortunes and failures owe their outcome to the use of leverage, that is borrowing to amplify the return (whether good or bad). The best and worst managers are known for driving their employees to work as hard as they can. Elon Musk is revered as a business genius, but known by insiders to create unrealistic goals and timelines that can never be met with the hope that sometimes the rank and file will find a way. He is known for his exacting standards and ever-changing goal posts, what some might consider a reckless disregard for the SEC which oversees his publicly traded company’s stock, but his car company is worth more than other traditional automotive companies combined – right or wrong.
The line between boldly inspirational and foolishly reckless is a razor thin line that is only visible in hindsight.
As investors and business-minded public, two things can point us in a better direction:
- Be careful who you praise and admire. Be careful who you look down upon and with to avoid becoming. Or be careful when assuming that 100% of the outcomes are attributed to effort and decision, when we all know luck had a role to play, whether good, or bad.
- Therefore, focus less on specific individuals and case studies and more on broad patterns, how to recognize them early and then take advantage of them.
We should be cautious in studying individual successes that tend to fill our newsfeeds and screens of all nature. Extreme examples of outcomes, good or bad are often the least applicable to learn from because the situations surrounding and leading up to the outcome are highly complex and probably not repeatable. Likely the outcome was influenced by extreme tails of either risk or luck. More actionable takeaways can be found when examining the broad patterns of success and failure. The more common the pattern, the more applicable it might be to your life. Trying to emulate Mr. Buffett’s investing success is difficult because his results are highly likely to have been significantly influenced by the role luck played. Bill Gates once said, “Success is a lousy teacher. It seduces smart people into thinking they can’t lose.” But the opposite can be just as true. Sometimes failure can be a lousy teacher seducing smart people into thinking their decisions were terrible, when sometimes they just reflect the unforgiving reality of risk and luck.
This content was inspired by the writings of Morgan Housel and is developed from sources believed to be providing accurate information, and provided by Verity Wealth Partners. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.