Are you good, or just lucky?
Photo: BegoBego. Source: Morguefile
Everyone who goes fishing has met them: folks who do everything wrong but still pull in fish after fish. They’re loud, their lines get fouled, they don’t have the right tackle, they go out at the wrong time—but they come back with a boat full of trophies. It’s tempting to say, “It works for them,” and change your own approach. But that would be a mistake.
You can’t judge anglers by the size of a single catch. Luck plays an important role in fishing, and in everything we do—especially investing. Suppose someone builds a ski area in Phoenix, Arizona. That winter a freak weather pattern develops and they receive 100 inches of snow. The resort turns a tidy profit. Does that mean building a ski area in Phoenix was a good idea? No.
The quality of a decision can’t be determined by the outcome—at least in the short term. This is apparent when you consider the mathematics of investing. A skillful manager can add one or two percent to a portfolio over time, after fees, relative to the market. But the market typically goes up or down 10 or 20 or 30 percent. Short-term market movements can overwhelm an investor’s skill. These market swings can mask what’s really going on.
Annual total return of the S&P 500, 1926-2014. Source: Bloomberg
People pay attention to investment results, but they should really ask themselves what caused the results. Lucky investors predict the future and build portfolios around their prediction. Skilled investors prepare for many different scenarios, and think of the future in terms of probability. They focus on what they can know, rather than on what they can’t know.
Fishing is unpredictable. The fish can be anywhere—especially trophies. And anyone can get lucky. But it’s been my experience that the luckiest boats (and investors)—who return successfully time after time—are the ones that are the most prepared. Luck is what happens when preparation meets opportunity.
Douglas R. Tengdin, CFA
Chief Investment Officer
68 South Main Street
Hanover, NH 03755