The Role of Luck in Trading

trading luck

trading luckNow that I have established a trading strategy that I believe suits my personality and will perform well, I have noticed a shift in my reading and writing interests. When I was still searching for a strategy to trade, I found myself gravitating towards posts about how different components of systems worked and what their impact on overall return would be. Lately, I have been focusing more on posts relating to trading and market psychology. Van Tharp would be proud.

This shift in mentality has led me back to some blogs that I originally discarded. I used to think that many popular blogs like The Reformed Broker and Abnormal Returns weren’t much help because they didn’t exactly match my trading style. However, now that I am looking at trading from a different perspective, I can see how many of their posts apply directly to what I am going through.

I was particularly interested in a paper that Josh Brown, who is The Reformed Broker, shared last week. His post described the paper as a “must-read,” so I thought it was probably something I should take a look at. The paper was actually a memo from Howard Marks from Oaktree. I’d never heard of him, but Josh made him sound like a pretty big deal.

Getting Lucky

The memo from Marks contains two major ideas. The first idea is that there is a significant amount of luck that has contributed to anyone who is successful achieving that success. The second idea is an interesting discussion about the efficiency of markets and exploiting inefficiencies. The discussion on how luck contributes to success was something that I found incredibly fascinating.

Marks spent a good portion of the memo explaining Malcolm Gladwell’s concept of Demographic Luck. He presented some of Gladwell’s key examples and then explained how Demographic Luck contributed to his success in a number of different ways. Some of his luck came in interesting ways, like not getting a job at Lehman Brothers and deciding to get his MBA instead of risking going to Vietnam.

Marks also addressed the influence of luck on investing success. He pointed out that an investor can have a terribly flawed approach, and get a lucky break. It is also possible for an investor to put in all of the necessary time and effort, only to be wiped out by a sudden collapse in the market. Regardless of the amount of preparation, or the amount of success, there is always an element of luck involved.

Am I Feeling Lucky?

I don’t usually feel lucky. Let’s get that out of the way. It’s a character defect. I generally spend more time focusing on what I want and what I don’t have instead of appreciating all of the things that I have been blessed with. Much like Marks, I could write an extensive list of the ways I have experienced good luck over the course of my life. But it’s easy to forget about that stuff when we’re in the trenches of life.

This luck discussion has had a bit of a haunting effect on my mind. I like to believe that regardless of what luck thinks, as long as I work hard enough good things will happen. While I believe that is true in the majority, this memo opened my eyes a bit to the fact that there is still some luck element that is out of my control.

The common phrase that I like to quote is that “luck is when preparation meets opportunity.” While I am certainly doing my part to handle the preparation side, I still need to have a bit of luck in terms of the opportunity side.

Wish me luck.