We get success in life due to two factors. One is our hard work, efforts and good decisions. Other one is luck. Many times a person gets good results due to favorable environment, support of the people around him. We do not have direct control over such things. Many people call it chance.
As per a survey done, handsome and beautiful people get better remuneration than the less handsome people. Here being handsome is not something for which these people have done some effort. Here we shall attribute the difference in remuneration to luck.
In his book “ 7 Habits of Highly Effective People” Stephen Covey writes that a person should do only those tasks which are under his/her control and can be influenced by his/her efforts. One can get better results by doing good actions and taking better decisions.
Sometimes one may face an unfavorable outcome even after taking good actions and vice versa.
Now you would ask what all this has to do with investments.
In our lives we see around us and find many successful people. Some of those people are successful because they worked hard and made good decisions in life but some of them succeeded because they found favorable conditions and support from people around them. People belonging to the later group got success due to factors over which they do not have direct control. We read biographies and articles about successful people and get inspired by them. We get inspired from people around us who have achieved success and great heights in career or business and try to emulate them. We start doing things which they have done. We start taking decisions which they have taken. We start investing in assets where we do not have control over.
We should be mindful of our inspirations.
Let us try to understand this in the field of investments.
INVESTOR A invested all his money in two stocks and his wealth grew 100 times in a short span of time. Here luck or chance can be attributed for his extraordinary success.
INVESTOR B invested all his money in two stocks and failed as both the companies went bankrupt. Again here luck or chance can be attributed to his miserable performance.
INVESTOR C distributed his money and invested in ten different stocks. Two of those ten stocks performed extremely well and grew to 100 times in a short span of time (Just like INVESTOR A). Two of his investee companies went bankrupt. Rest of the six stocks performed normally and grew 12% CAGR. Overall his extraordinary returns from two stocks got averaged due to loss and his overall returns were normal. Here his performance is the result of his methodical way of investing. So whatever success he got is due to his efforts and not because of luck or chance. He diversified his money instead of investing in only two companies. Although his returns are less than that of INVESTOR A, his returns are consequent to his good decisions. Here the role of luck factor is negligible.
What can we infer from the book?
When a scheme is performing extremely well, it is not necessarily due to the talent of the fund manager. This could be due to the extremely good performance of the sector where the fund manager is bullish and has invested heavily. So in order to judge the capability of the fund manager we use a method which we know as “ TIME TEST”. Truth prevails in the long run. If we analyze a fund manager’s performance over a long period of time, some of the years his performance would be extremely good and some of the years not so well. Luck would have favored him some of the years while it would have been unfavorable in the other ones. Over a period of time, performance averages out and is an indicator of the manager’s capability.
By reading this book, one can learn that one should not judge people on the basis of their success or results, instead one should analyze how much of his success is due to chance and how much is the effect of his hard work. For example a smuggler might have earned a lot of money so young minds or naïve ones start thinking that one should get success without thinking about morality. If we analyze carefully, we find that he has taken enormous risk in order to earn money. The risk is not worthwhile. His career and life both are at odds.
Hope we shall learn from the writer and make better decisions in investing and in life.