Investing success: Skill, luck or just good karma?

Writing those five points in the answer ensured we would get the maximum possible marks from the board examiner. This was almost ironclad, and you knew nobody could outscore you on that answer.

In school, a structured answer guarantees success; the rules are clear, and outcomes are predictable. Unfortunately, in the investing world, there is no such equivalent. Whatever your chosen investing process, there is no guarantee that you will get the best possible score. You may well be outscored.

It’s not that long-term investors have a singular style. Some swear by the philosophy of margin of safety, while others may invest only in high-quality businesses with a moat. Some may be guided by momentum and others may swear by being contrarian. There is no singular truth in the investing world and there are far too many approaches for me to list here. Each of these approaches or ideologies has its pantheon of idols, who are cherished and hero-worshipped. Even a straightforward strategy like Index Investing has its heroes.

Each of these investing strategies has worked for many, but not everybody, and over time, but not at every moment! 

It’s good to remember that the stock market is a place designed to humble you. When you combine investing ideology and an ego that cannot accept being outscored by another participant, it is a recipe for misery. Somebody will always be making more money than you. The ardent, disciplined pursuit of your investment strategy is no guarantee of outperformance every day or every year.

Mr Market is a rather moody person. He does not respect forecasts, calendar years, financial years or your birthday and anniversary.

Also read: To my teacher, the stock market

Investors who change their ideology and heroes based on what is currently in fashion will likely find that the trend is always one step ahead of them and prone to inflexion. The stock market is a costly place to discover who you are and what you believe in.

Luck versus skill: The unseen hand in market outcomes

Investing is a field in which monkeys throwing darts have beaten professional stock-pickers. Rob Arnot of Research Affiliates simulated this process and randomly selected 100 portfolios containing 30 stocks from a 1,000-stock universe in the US. They repeated this process every year, from 1964 to 2010. The result was that on average, 98 of the 100 monkey portfolios beat the 1,000-stock capitalization weighted stock universe each year. So much for investing ideologies.

One method of distinguishing luck from skill is proposed by Michael J. Mauboussin, author of The Success Equation. Ask yourself whether you can lose on purpose. If you cannot lose on purpose, it means luck plays a significant role in the outcome.

During the covid pandemic, there was a shortage of oxygen cylinders in India. The stock price of Bombay Oxygen doubled in 20 days from March to April 2021. Except the company had shut down its oxygen business a while back and what remained was a finance business. Lucky for some investors, not so lucky for others.

In the US, a few investors at Zoom Technologies were rewarded with a near 100-fold increase in the stock price from March to April 2019. This was likely a case of mistaken identity, with the company Zoom Video Communication (maker of the popular video conferencing software app Zoom) listing in April 2019. The stock of Zoom Technologies, which had nothing to do with the Zoom App, dropped 80% with the listing of the actual creator of the app. I cannot think of many fields in which poor research can be handsomely rewarded!

That I could be outscored by another student despite doing everything right was not in the realm of possibilities described by my chemistry teacher. What appears to be the skill of an investor, and the superiority of their ideology, often includes a component of luck that remains invisible and unacknowledged. 

Also read: Indian stock market: Lessons for investors from 2024 and risks ahead for 2025

For investors what really matters is whether their wealth creation journey enables them to achieve their financial goals. A marathoner is a marathoner regardless of time. That is my experience from years of running. Focus on continuous improvement in your process rather than picking holes in other methods. Before attributing somebody else’s success to luck, consider the possibility that lady luck has blessed you too.

Investing is not a board examination with a finite date. Wealth needs time to compound, just like a plant needs water and sunshine. 

Don’t fall prey to your ego. May the wisdom of the Bhagwad Gita be the guiding voice in your head during your investing journey: “Hell and self-destruction have three gates: lust, anger and greed’. Resisting these gates can lead to more mindful wealth creation."

Vetri Subramaniam is chief investment officer at UTI Asset Management Co.

The views expressed are the author’s own views and do not necessarily relect those of UTI AMC.