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Sunday, July 21, 2024

The Silent Force Driving Success in Life and Investing


The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life

Buy your copy of the book Morgan Housel calls “a masterpiece.” It contains 50 timeless ideas – from Lord Krishna to Charlie Munger, Socrates to Warren Buffett, and Steve Jobs to Naval Ravikant – as they apply to our lives today. Click here to buy now.


On a cold morning in 1931, in a small town in the US, a seven-year-old boy was playing with a young girl when they were unexpectedly attacked by a stray dog. Tragically, the girl was bitten, contracted rabies, and succumbed to the illness. The boy, miraculously, emerged unharmed.

This boy grew up to be known as Charlie Munger. Yes, you read that right.

Reflecting on this incident later in life, Charlie pondered and said, “That damn dog was three inches from me. All my life I’ve wondered: why did it bite her instead of me? It was sheer luck that I lived and she died.”

This childhood experience shaped Charlie’s worldview, and throughout his life, including his extensive career in investing and finance, he remained acutely aware of the role luck played in his successes and the lives of others.

You see, when we hear stories of success, we often attribute achievements solely to talent, hard work, and individual brilliance. While these factors are undeniably important, Charlie’s story reminds us that luck —both good and bad — plays a significant role in shaping our paths.

Let’s apply this concept of luck to the world of investing. Financial markets are dynamic and often unpredictable. Despite the temptation to idolize successful investors as visionary geniuses with an uncanny ability to predict market movements, even the most astute investors recognize the profound influence of luck on investment outcomes.

Types of Luck in Investing

Luck in investing can show up in various forms.

Being in the right place at the right time, or getting your timing right with your investments is one of those forms. There have been investors who have been successful in timing the market cycles, and that involved a combination of deep research and a sound understanding of market behaviour. However, even the best investors acknowledge that timing the market perfectly is exceedingly difficult and often relies on elements of luck.

Luck also drives unexpected developments, such as technological breakthroughs or management changes, that significantly impact the performance of stocks you own.

And then there are several external factors that affect entire markets, regardless of individual stock selection or strategy. These can get you good luck or bad luck as an investor. But let’s remember that luck has a role to play here.

Now, given that luck plays such a significant role in investing outcomes, acknowledging its role is crucial.

Most things that happen to us are things that we do not foresee and do not control. And so, luck serves as a humbling reminder of the limitations of our foresight and control. It encourages us to approach our successes and setbacks with humility, acknowledging that not all outcomes—positive or negative—are entirely within our power to predict or influence.

In Charlie’s case, his childhood experience with the dog attack instilled a deep sense of humility and appreciation for life’s uncertainties. This perspective is invaluable in helping us deal with the highs and lows of life as well as investing, because that helps us build resilience during market downturns and practice gratitude during periods of prosperity.

Now the question is – are there any practical ways you can incorporate the role of luck in investing? The answer is yes, you can.

How to Get Lucky?

One of the important ways to do that is to focus on the process instead of the outcome. A sound investment process integrates both qualitative and quantitative factors, emphasizing thorough research and good analysis.

When you practice a disciplined investment process, you can reduce reliance on short-term luck and base your decisions on fundamental principles. This approach can help you improve your long-term investment returns because you are not getting worked up by the short-term market volatility, which often leads most investors to make mistakes that hurt their long-term performance.

Also, I think a transformative mindset shift involves reframing luck as the meeting point of preparation and opportunity. As they say, when you do the hard work, you can get lucky.

Check out my earlier post on Ben Graham’s investment in GEICO, which turned into a 500-bagger. Graham suggested that he got tremendously lucky with GEICO. But was that just luck? No!

As he wrote in the postscript of The Intelligent Investor

…behind the luck, or the crucial decision, there must usually exist a background of preparation and disciplines capacity. One needs to be sufficiently established and recognized so that these opportunities will knock at his particular door. One must have the means, the judgment, and the courage to take advantage of them.

Before I end, let me reiterate that Charlie’s life story offers a great insight into the role of luck in life and investing.

When we recognize luck’s influence, we can gain a deeper understanding of the complexities inherent in financial markets and decision-making processes. This awareness leads us to become more humble, more resilient, and build a disciplined approach to investing that prioritizes long-term value creation over short-term gains driven by lucky events.

The way to win in the stock market, according to Charlie Munger, is to work, work, work, work and hope to have a few insights. The question is – how many insights do you need in your investing lifetime?

Not many, as Munger says (and Graham proved with GEICO) –

…you don’t need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that’s with a very brilliant man — Warren’s a lot more able than I am and very disciplined—devoting his lifetime to it. I don’t mean to say that he’s only had ten insights. I’m just saying, that most of the money came from ten insights.

…you’re probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It’s just that simple.

To conclude, here is a formula to benefit from luck, which is the silent force that drives success in life and investing, to create wealth from stock market investing over time – Be prepared and wait for a high-quality business at reasonable price, stick with it over time till the business does well, then be humble to credit luck more than your skill for whatever success you achieve, and repeat this process if you get another fat pitch. Rest of the time, don’t act much. That will be your true skill.

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