I thought I would take some time out on Saint Patty’s Day to talk about luck.
There’s a completely Darwinian take on the market which says that the ebb and flow of market conditions is completely random and, therefore, unpredictable. All good investors have found their pot o gold by being lucky, not smart or skilled.
I think there is some truth to it, but it’s more of an excuse than a theory.
If this were so, no one could be lucky enough to sustain multi-decade careers as investors. There would be no Warren Buffett and the long list of trend investors who have profited in the market over long stretches. The theory also explains why so many dumb investors lose money.
The market is a complex, adaptive system that appears random. It is hard to predict, but not unpredictable. Some segments of the market at certain times become more predictable, or less predictable. Even a good poker player gives tells–hints to how he or she might play a hand. The pupils may dilate. The player may develop a cough or a tic.
Likewise, the market — composed of millions of poker players — will offer tells. These tells manifest as statistical aberrations across the fundamental, technical and psychological spectrum. Whole schools of investment theory spring around these tells.
I have another analogy. Let’s say you are stopped at an intersection with a choice of a left turn or a right turn. The car in front of you does not have its blinkers on. What are the odds you can predict the direction of this car? I’d say 50-50. It’s completely random, so go on and take a guess. But, what if the car had a bumper sticker that correlated with a town that was on the left. Could you be wrong guessing left? Sure, but the probability is this car is heading toward the left because most people don’t spend their days and nights randomly driving around the countryside. They head home.
In the market, sometimes that town is on the left and sometimes it’s on the right. But there are always signals.
And that’s the critical thing : the reliability of all market signals changes over time as the market adapts.
More-than-lucky investors adapt as their signals adapt.
I’d be glad to hear your opinion!