Many of you may have been beating yourself up for the past 3-4 years (or maybe your entire adult life) over the past performance of your stock picks, or the performance of your 401k, or by comparing yourself to the investment success stories told by your friends. Well, here is something that might convince you to go easy on yourself. Read the excerpt below and then my comments as to whether it's better to be lucky or smart.
This excerpt is from the article ‘Don’t Blink! The Hazards of Confidence’ (The New York Times Magazine October 19, 2011) by Daniel Kahneman, an emeritus professor of psychology and of public affairs at Princeton University and a winner of the 2002 Noble Prize in Economics.
“Mutual funds are run by highly experienced and hard-working professionals who buy and sell stocks to achieve the best possible results for their clients. Nevertheless, the evidence from more than 50 years of research is conclusive: for a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker. At least two out of every three mutual funds underperform the overall market in any given year.
More important, the year-to-year correlation among the outcomes of mutual funds is very small, barely different from zero. The funds that were successful in any given year were mostly lucky; they had a good roll of the dice…The subjective experience of traders is that they are making sensible, educated guesses in a situation of great uncertainty. In highly efficient markets, however, educated guesses are not more accurate than blind guesses.
Some years after my introduction to the world of finance, I had an unusual opportunity to examine the illusion of skill up close. I was invited to speak to a group of investment advisers in a firm that provided financial advice and other services to very wealthy clients. I asked for some data to prepare my presentation and was granted a small treasure: a spreadsheet summarizing the investment outcomes of some 25 anonymous wealth advisers, for eight consecutive years. The advisers’ scores for each year were the main determinant of their year-end bonuses. It was a simple matter to rank the advisers by their performance and to answer a question: Did the same advisers consistently achieve better returns for their clients year after year? Did some advisers consistently display more skill than others?
To find the answer, I computed the correlations between the rankings of advisers in different years…That yielded 28 correlations, one for each pair of years. While I was prepared to find little year-to-year consistency, I was still surprised to find that the average of the 28 correlations was .01. In other words, zero. The stability that would indicate differences in skill was not to be found. The results resembled what you would expect from a dice-rolling contest, not a game of skill.”
What this tells me is that luck has a lot to do with how we succeed. Since that is the case, you should strive to be lucky. You say, “But luck, by its very definition, is beyond my control!” Not really. Luck happens when you stumble upon a situation that works in your favor. So the goal should be to create more situations to stumble upon. It does indeed boil down to the old adage, ‘The harder I work, the luckier I get.’ But make sure that your work creates more rolls of the dice, more chances for you to become lucky. Don’t waste energy on work that doesn’t create an opportunity for luck to strike. And don’t loose energy when it doesn’t strike - just go out and create another opportunity. So, would I rather be lucky or smart? I’d rather be smart because my smarts allow me to create the opportunities where luck happens.
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