Most of us wouldn’t consider ourselves skilled investors since we don’t work on Wall Street. Does that mean we are all just lucky? Where does luck end and skill even begin because it certainly isn’t all luck. Then we’d all being playing our favorite lotto numbers or sports gambling instead.
On the surface, we contribute to a 401(k), index funds, IRAs, individual stocks, stock grants and our investments grow over time. Just like risk, luck and skill are what we don’t see.
It all starts with luck.
Before I ever got my first real job with a 401(k), I as well as my husband developed the skill of living with uncertainty. The summer I decided to take classes at Iowa State University to upend my intended major, I had to find someplace to live for 2 months. It was before the internet, so I randomly called Roommate Wanted ads from the local newspaper while temporarily staying with my older cousin who lived in Ames. It was more or less throwing darts.
I had no intention of starting a serious relationship since I was only going to be there for a couple of months and my track record had been pretty sparse with my graduating high school class of 45 girls and 15 boys. After getting to know my roommates, however, one of them thought I would be a good match for her ex-boyfriend. They were still friends and she invited him and his roommate over. The rest is history.
Luck or divine intervention, whatever you want to call it, is how I met my husband. I had hit the bullseye through no skill of my own. For 3 years, we kept a long-distance relationship going. We had no cell phones, no FaceTime, no social media, just a landline phone we shared with roommates and a CB, radio that is, in my car.
Our overarching goal was to graduate with practical degrees at the same time. We had our separate lives 4 hours apart and never knew exactly what the other was doing with classes, work and extra-curricular activities for the two weeks we were usually apart. Although, I did have to use the CB to radio for help when I slid off the icy road into the ditch and was lucky to have it.
Uncertainty
Uncertainty is a lack of sureness, a state of doubt, or a situation involving imperfect and unknown information. Learning to sit with uncertainty early on in life directly translated to the ability of enduring the uncertainty of investing and the stock market.
Back then we couldn’t check our 401(k) daily because there was barely internet. We had to embrace the unknown just like we did during those 3 years apart and when we moved to Atlanta. It opened up more opportunities together than if we had both stayed in our own separate worlds.
Process
To manage the uncertainty, we developed a process while dating with of one of us driving the almost 4 hours to see each other every 2 weeks. Investing is also a process of contributing to your 401(k), IRA, brokerage account every 2 weeks or whenever you get paid.
There is no true skill in picking investment funds or stock when you have little to no knowledge of what they even are and how they work. Instead, you pick something that appears reasonable and that you are comfortable making repeatable.
By focusing on the process and the things you actually can control (your savings rate and frequency, your asset allocation, the fees and taxes and your discipline/automation), the uncertainly becomes more manageable. You are less likely to break that rhythm when you are dodging the uncontrollable darts (events) shamelessly puncturing holes into your portfolio deflating its value.
You don’t allow fear to take over that would trigger a fight-or-flight response with you selling everything to stop the pain. Instead, the process keeps you going because you do know that a market downturn has never been unrelenting in your lifetime and you can endure the uncertainty pain until it passes.
You have to commit to the process.
Knowledge
The first goal we set as a couple was to get an education. I already knew I had to get a beneficial degree because the jobs that didn’t require a degree, I found unfulfilling.
Accumulating knowledge is important and compounds just like returns. It helps you distinguish the true opportunities from the hype. Applying what you learn helps you adapt to changing market conditions and change course when required.
Experience shapes the choices you make and the subsequent chances you take. And if you don’t have the time or interest in gaining investing knowledge, you hire someone who does.
Time
According to Warren Buffett, the real test of investing skill is whether the results you have earned can be repeated consistently over many years, across different market conditions and isn’t a lucky streak that could just as easily belong to a dart-throwing monkey, the “Lucky Monkey Problem.”
Time builds patience, trust and the underlying ability to question if your portfolio is too aggressive or complicated for where you are at in life.
Ignoring both the captivating and depressing noise over the years is hard but it is the sign that luck is fading into skill.
For the 30+ years I have been married and investing, I still consider myself lucky.
A new question has emerged if you can create your own luck. Older school thinking says that you can’t make your own luck, that it is a paradox of skill where more skill equals more luck.
Teena Selig, a professor at Stanford with a PhD in Neuroscience, challenges this assumption with her new book on how to create your own luck. She says luck emerges from how we respond to what happens to us. Believing that good things just happen to people misses the realization of all the things that set that good thing into motion.
One of the most important things you can do to increase your luck, she says, is to write thank-you notes which may sound quaint. My husband I and wrote each other cards and letters during the 3-year long-distance relationship we cultivated because email wasn’t a thing yet. I still have all of them.
Writing a thank you or even just a personal note is an investment in goodwill. It’s a sincere act acknowledging someone’s impact or efforts that benefited you while giving them appreciative feedback. From personal experience, it does have significant effects that are hard to explain just like luck.
The continuum of luck and skill will always exist but could more of it be within your control?
To be continued.
4 Key Investing Lessons from Warren Buffett’s ‘Lucky Monkey’ Problem
6 Simple Ways to Improve Your Investment Performance – A Wealth of Common Sense
New book explores how to create your own luck | Stanford Report