The world is full of randomness and people behave differently at different times so that it is difficult to predict the exact future. If we study the science and mathematics cycles then those have predictable sets of rules and moves in a regular way. But economics, companies, and participants are relying on the psychological influences so that they do not behave in a regular way. When emotions have an involvement then things become more difficult to predict.
So that Greed and Fear of the investors remain regular in every cycle. This affects the prices of the assets.
As per the Cambridge dictionary, the definition of cycle “a group of events that happen in a particular order, one following the other, and are often repeated.”
We can see that many factors affect the occurrence of the events and that makes it difficult to predict the exact for the future. Current global scenario, we have an ample number of factors that can affect the cycle such as crude, the decision of the USA, domestic economic conditions, etc.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
One of the books which have influenced me and my investment journey is “The Most Important Thing by Howard Marks”. This book teaches us the most important thing which we need to develop for becoming a wise investor.
“The Most Important Thing” has many concepts which can help us to our investment journey. I have posted articles on the book. Now, I have compiled different articles into the one file for the ease of reading.
While we involve into any of the investment decisions then those decisions are having dependencies on the future. As we know that future is uncertain and it is difficult to predict it. In such uncertain investment environments, luck plays an important role and we have to recognize the role of luck in our investment journey.
When we get some result or looking at the result then we must have to think the role of randomness in that generated result.
Many outcomes are visible to us but we have to think those outcomes with different viewpoints. If someone has made a risky & uncertain investment and he gets a good outcome from it. We can say that such outcome happens due to luck not due to skill. But people take such outcome as their skill, not consider a role of luck.
For example, baller throw ball towards stump for capturing a wicket of the batsman and that becomes the wrong throw and ball has touch boundary line then it is not a skill of batsman but the role of luck.
Many times, people get the return on investment by just being in the right place at a right time. Not due to their skill.
In short term, we can able to generate a good return and many a time achieved an abnormal return by just being in the right place at a right time. But what about the long-term result? How we can say that luck always keeps on favoring us.
Generally, during a boom period, the person who takes a higher risk get highest returns. But that is not the reason to consider them as the best investors. Very few people appreciate the role of randomness or luck in the life or in investment journey.
Mr. Taleb has mentioned the list of things which are generally mistaken by us.
We should understand that when things going right, luck looks like a skill and people misinterpret lucky investors as skillful investors. Many a time, we get an extremely good reward by chance and we make a mistake to consider such result as our skill.
That means batsman hit ball for six and that ball also declared “No ball” and batsman get free hit and he again hit another six on a free hit.
In short run, we can win and make good returns by an occurrence of chances but in a long run, our wise decision provides us a good reward.
When we realize that investment outcomes get an influenced by the randomness then we can able to focus on every event with the different perspective. Otherwise, we just thought that such outcomes happen due to our skills only.
We have made a list of assumption for the occurrence of events but we also should focus on the occurrence of other different events; which we may not have assumed. It might be possible that sometimes all other events have collectively more probability to occurred compared to the single event on which we have put the huge focus. Such ignorance becomes dangerous for our financial health.
Investing something like a mixture of both skills as well as luck. Investing is not a pure luck like a snake and ladder game or not a purely skilled by the game of chase.
While we play chase then we require a skill to protect ourselves from moves of an opponent’s. We cannot able to win chase just by waiting for the favor of luck and mistake made by an opponent. We have to create a scene where opponent commits a mistake and we can able to win a game.
Whereas, there is not a requirement of a skill in throwing a dice while playing a snake and ladder game.
But we generally consider our winning as our skill while we should recognize that we are winning a snake and ladder just due to a support of a luck. While we should reach towards 100, we should not forget that there is a snake on 99 number which can bring us towards number 7. And transform our success into failure due to highly dependencies luck. Similar happens to us while we play an investment game on the base of pure luck. We may win till number 98 and maybe that our fortune transforms into failure by destruction in our wealth. We climb many ladders, get many multifold return generator stocks but we forget that such occurrence is due to luck. If we do not have our skill involve in it, then our wealth get destroy. We should not forget that investment requires a luck but also it requires a skill. If we fully dependence on the luck then we should never forget a snake on number 99.