In Slavic languages spoken by 360 million people today, the word for “luck” and “happiness” is the same.
In our posts, we have frequently stated: “With the Habits of Monday Morning Millionaires, luck hardly matters. Good luck!”
Michael McCloskey is the founder and president of Greenskeeper. We highly recommend his services to members and subscribers who want to outsource some or all of their money management to experts.
We asked him to write about the role of luck in investing. This is what he has to say.
The Role of Luck in Investing
Have you ever experienced a close call that could have been life changing had it turned out a different way? Perhaps a narrowly-avoided accident that left you breathless.
A global pandemic suddenly emerges and a restauranteur is faced with an existential business challenge whereas a grocery store owner receives an unexpected windfall. Shareholders of these companies are in fact (partial) owners of these businesses. Like it or not, luck – both good and bad – plays a larger role in life than most of us care to admit.
The reality of the world is that the future is unknowable with absolute certainty. Strange and unexpected things happen from time to time. As famed value investor Howard Marks likes to say, “Risk means more things can happen then will happen.”
But just because the future is far from certain, does not mean that it is entirely unpredictable. Lessons gathered across wide-ranging disciplines – from quantum mechanics to professional poker – teach that the way to deal with the inherent uncertainties of life is to think in probabilities. Investing is no different.
In her book Thinking in Bets,(1) world champion professional poker player Annie Duke provides several useful principles that we can apply to investing. Make large bets when the odds are in your favour. Good decisions can result in bad outcomes on occasion due to chance so it is important not to conflate the two (a mistake poker players term “resulting”). But over hundreds of hands, good decisions will more often lead to good outcomes.
At GreensKeeper, we apply the same principles to investing through our value investing approach. Done properly over long periods of time, it minimizes the impact of luck and improves the odds of attractive investment returns. More specifically:
- We stick to investing in high-quality companies with economic moats whose futures are reasonably predictable.
- We purchase shares in these businesses when they are materially undervalued.
- We avoid using financial leverage so we are never forced to sell.
- We assemble a diverse portfolio of 15-20 of such businesses in order to mitigate bad outcomes due to errors of judgment and low-probability negative outcomes (bad luck).
- We think long-term and avoid trying to predict short-term market moves which we believe are essentially random.
Even the greatest of investors like Warren Buffett will make mistakes of judgment and experience instances of bad luck. But by constructing a resilient portfolio with individual stocks purchased at prices offering favourable odds, over the long term your overall outcome is likely to be a good one.
As the Stoic philosopher Seneca so aptly put it, “Luck is what happens when preparation meets opportunity.”
Michael is the Founder and President of GreensKeeper Asset Management. He founded the firm in 2010 after successful careers in law and investment banking, and is a regular contributor to the Globe and Mail.
- Annie Duke, Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts (New York: Penguin, 2018)
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