The Role of Luck In Investment Success Is Overrated

Of Dollars and Data shared an interesting post titled, “Bad Investment Results?  Your Birth Year May Be to Blame:  How Luck Influences Investment Success and What To Do About It.”  As the title implies, the post largely explains how being born at different periods throughout history would likely have played a role in how one’s investments turned out, at least over subsequent decades.  This is an important consideration as the benefit of good fortune cannot be discounted.  In fact, more important than the year in which you were born is the country of your birth.  Given that the United States is an anomaly when it comes to stock market success, an American investor holds a sizable natural advantage to one born into less successful markets such as Austria or Italy.

However, the authors conclude, luck matters only so much as we allow it; after all, variables such as our savings rate, investment discipline, and opportunism play a far larger part in desired outcomes than chance.  This is a critical observation, and one that is too often dismissed when we ascribe the success of certain investors only to chance.

Consider, for example, investors who were lucky enough to be one of the early investors in Amazon.  Along the way to becoming one of the largest firms in the world, Amazon suffered considerable drawdowns, including a catastrophic one of more than 90%.  It is unlikely that many of the original investors stuck around in the lean years to realize the fullest potential of the investment they had made.

Assuming these same original Amazon investors did not sell their shares during a downturn, there is ample reason to believe that many of them them parted ways with their shares after only limited gains.  That is because investors are far more likely to sell their winners too early, while holding onto losing positions in hopes being made whole.  So even if you had the very good luck of being an early investor in one of the titans of the 21st century, poor investment behavior likely meant that you nullified any advantage that “luck” had sent your way.

To use the example of generational luck that Of Dollars and Data provides, there is no reason to believe that previous investors blessed to have been born in more profitable times would have done much to maximize their opportunity.  That is because most investors tend to underperform the market, even when it is offering generous returns:


Certainly, the accuracy of the Dalbar study upon which this graphic is based has been called into question, but even then I am inclined to believe that the thrust of the study is accurate, even if the absolute data are not.  In 2009, in the depths of the bear market that in hindsight marked a tremendous buying opportunity, many investors let their fears blind them to the huge opportunity that “luck” had given them, and sold out instead of doubling down.

In other cases, we look at those who inherit wealth and begrudge them any credit for maintaining it or building upon it.  Yet I can say that in my own experience, I have seen the “luck” of sudden wealth squandered by greed and ill-discipline far more often than it is exploited for productive purposes.

The old saying that “luck is what happens when preparation meets opportunity” is precisely right in this and all other investment scenarios.  The most that luck can do is present us with an opportunity, but from there it is all up to us and how we react.  Even today in a global marketplace, variables such as the place of one’s birth are seriously minimized given that the internet opens up just about every capital market to any willing investor.  The excuses we make to explain our poor results are becoming less and less plausible.  In the final analysis, if we fail as investors, it will not be a lack of luck that caused it; we will have only ourselves to blame.

