How Much Of Investment Success Is Luck?
b'Howard Marks on \\u201cLuck in Investing\\u201d
Some of my regular listeners may recognize the name, Howard Marks. \\xa0He\\u2019s the 67-year old billionaire who co-founded investment management firm Oaktree Capital which manages about $84 billion in assets, mostly in alternative investments such as high-yield bonds and has delivered a whopping 23% average annual return over the past 25 years.
Marks regularly puts out memos outlining his views and philosophies on a broad range of topics related to the investing business. One of his recent memos addresses the role of luck in investment success.
Marks starts his memo with a quip from Jack Dorsey, the founder of microblogging platform Twitter, who recently tweeted that \\u201cSuccess is never accidental. \\xa0No accidents, just planning; no luck, only strategy; no randomness, just perfect logic.\\u201d
This quip went against Marks\\u2019 grain. \\xa0Marks himself believes luck, circumstance and randomness play a huge role in success, and this tweet prompted him to address the issue of luck in the investing game in this recent memo.
a great many things contribute to success. Some are our own doing, while many others are beyond our control
Marks says \\u201cA great many things contribute to success. Some are our own doing, while many others are beyond our control. There\\u2019s no doubt that hard work, planning and persistence are essential for repeated success. But even the hardest workers and best decision makers among us will fail to succeed consistently without luck.\\u201d
The Components of Luck in Investing
Marks says the components of luck range from accidents of birth and genetics, to chance meetings and fortuitous choices, and even to random, unforeseeable events that cause decisions to turn out right.
Luck, according to Marks and others, takes on many forms such as demographic luck and the Ovarian Lottery which is about being born at the right place, to the right parents, at the right time.
For example, Warren Buffett says \\u201cI\\u2019ve had it so good in this world, you know. The odds were fifty-to-one against me being born in the United States in 1930. I won the lottery the day I emerged from the womb by being in the United States instead of in some other country where my chances would have been way different.\\u201d
Buffett is insightful enough to realize (and secure enough to admit) that he isn\\u2019t solely responsible for his success. What if he\\u2019d been born in Bangladesh instead, or born a woman in 1930, or missed out on studying under Ben Graham at Columbia? \\xa0Luck played a role in making him who he is.
Similarly, Marks believes there is luck in investing. He writes, \\u201cPerformance is what happens when events collide with an existing portfolio. We arrange our portfolios in expectation of what we think will happen in the future\\u2026 and get desired results if future events conform to our expectations\\u2026 and less-desired results if they don\\u2019t.\\u201d
He says, even if investors\\u2019 skillful analysis and reasonable assumptions are \\u201cright\\u201d in some abstract sense, it still takes a great deal of luck for their version of future events to materialize.
He then quotes Elroy Dimson of the London Business School who said \\u201cRisk means more things can happen than will happen.\\u201d The future isn\\u2019t a predetermined scenario that\\u2019s sure to unfold, but rather a range of possibilities, any one of which may happen. And even the most rigorously derived view of the future is far-from-sure to be right. Many other things may happen instead.
Even when we assemble our portfolios diligently, unpredictable future events determine whether our performance will be rewarded or punished. People whose expectations are borne out generally make money, and those whose aren\\u2019t lose.
Sometimes, even though an investor\\u2019s projections are \\u201cwrong,\\u201d the investor may be bailed out by unforeseeable positive developments such as non-fundamentally based price appreciation. Marks says such an investor is \\u201cright for the wrong reason\\u201d (or just plain \\u201clucky\\u201d).
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