A wise man once said, “I am a great believer in luck. The harder I work, luckier I get.”
Believers in this saying usually belong to the meritocratic school of thought. They claim, “If you’re good, you don’t need luck.”
If you’re successful it’s a natural human tendency to assume the credit for your success. After all, you must have worked hard for it and you surely deserve it. But when I think of my life, I have seen and met many individuals for whom, in spite of working extremely hard, success remained elusive.
Goes with saying that I have also met those who achieved great heights with relatively much lesser effort. These are the people who manage to attract much more than their fair share of luck. Usually, we look down on such people with some envy and disdain. It’s assumed that any success founded on an element of luck is inherently undeserving.
Do you know someone who always manages to find himself in the right place at the right time? Before you label him as lucky, ask yourself – do you think his luck is out of pure randomness? Perhaps he has a knack for arriving at the right place and at the right time.
Common sense tells us that luck can’t be controlled and it’s all about chance and probability. But what if someone told you that there was a way to control luck? Not in an esoteric way but in a rational way? If you feel like scoffing at such an idea, I would urge you to have an open mind. Just for the sake of curiosity.
In his book, How To Get Lucky, Max Gunther argues that luck, although may not be controlled, can surely be manipulated. He writes –
You cannot control your luck in a precise way. You cannot say, “I want the next card I draw to be the queen of diamonds, “ and have any reasonable expectation of that outcome. Luck isn’t amenable to fine-tuning of that kind. But you can bring about a substantial and even startling improvement in the quality of your luck. You can turn it from mostly bad to mostly good, from pretty good to better.
It’s a remarkable and thought provoking book, and here are five lessons I’ve learned from it that have a direct implication in investing.
5 Ways to Create Luck in Investing and Life
1. Surround Yourself With Wise People
Warren Buffett suggests…
It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.
It doesn’t mean that you should stop spending time with your loved ones and close friends. It also doesn’t mean that we shouldn’t share our knowledge with those who need it. But everyone has some people in their lives who hog disproportionate amount of undeserved time. Identify those people and disengage.
Reach out to those who are doing something which you find valuable and inspirational. If you respect their time and show a genuine attitude of learning, they would be happy to mentor you. I personally have reached out to dozens of people (who I look up to and want to learn from) in last one year and, almost everyone was kind enough to respond. In fact, this is how my association started with Vishal.
Your future is largely determined by two things, goes the adage – the books you read and the people you associate with. So crowd your life with wise people and see how luck starts favouring you.
Nothing, nothing at all, matters as much as bringing the right people into your life, writes Guy Spier in his book The Education Of Value Investor, “They will teach you everything you need to know.”
As a small investor you may never get a chance to have a direct access to people like Warren Buffett and Howard Marks. However, what you can do is to surround yourself with their teachings. Read their words again and again until they go deep into your subconscious. Have their biggest ideas framed and hang them in your study.
Guy Spier writes about the idea of being in the force field of your ideals. When you’re analysing any business, think about what questions a smart, successful investor you know of would have asked. Ask what mental models someone like Prof. Sanjay Bakshi or Charlie Munger would have used to think about the same problem.
2. Take Calculated Risks
This is the most hackneyed advice that you could ever get. But let me add my perspective to it and how this has worked out in my life.
Right after 12th standard, I had two choices for pursuing a career in engineering. Take admission in one of the NITs (National Institute of Technology erstwhile known as RECs) or drop out one year and prepare for IIT. Although many of my friends were dead scared of having a gap of one year in their academic careers, my father reasoned that dropping out wasn’t such a big risk. Because even if I don’t get into IIT next year I’ll still end up with a good NIT college. Moreover, loss of one year wasn’t such a big deal in the larger scheme of things. I heeded to my father’s advice because it looked like a calculated risk. Lady Fortuna smiled next year and I found myself in IIT.
Similarly, when I quit my job to work full time with Vishal at Safal Niveshak, it looked like a big risk but it wasn’t. With 10 years of experience in the IT industry, getting back into a job isn’t very hard. So the downside is very limited. And upside – working with Vishal on something which I loved doing – was pretty huge.
Popularly, there are two extremes to the idea of risk taking. One is where the risk is out of proportion to the rewards being sought. And the other is to take no risks at all. Lucky people avoid both extremes. They cultivate the technique of taking risks in carefully measured spoonfuls…If you feel good luck has been avoiding you, it is far more likely that you lean in the direction of too little risk taking rather than too much.
Mark Zuckerberg, founder of Facebook, says, “The biggest risk is not taking any risk.”
Assess the risk and determine if it is really as big as you supposed. If it is, and if the hoped-for reward is small, then avoid it. But if it is minor and the potential reward is big, then take a deep breath and leap forward.
If you’re not very near to retirement age, i.e., you have at least a decade of working life ahead of you, putting all your money in bank fixed deposits could be very risky. Once you have saved money for your emergency fund, some portion of the residual cash should be invested in equities whether it’s in the form of SIPs in mutual funds or direct investments in shares. The money that you don’t need for next five years and beyond should be used for taking calculated risks.
The idea is to be hyper-conservative (extremely risk averse) with those resources which you need for maintaining your lifestyle. And being ready to take calculated risks with those resources which are residual and which you can afford to lose, of course, for the sake of higher long-term returns.
3. Don’t Overemphasize Goals, Give Serendipity A Chance
Sometimes too much emphasis is given to goal setting. Remember, the goal of having a goal is to push you forward, to start the ball rolling and provide a general direction for proceeding. But getting rigidly attached to the goals can turn them into roadblocks.
Having a vision is very important and one should be quite inflexible on that, but goals are supposed to be intermediate milestones which means there should be adequate room to take a detour. If you put blinders on yourself so that you can see only straight ahead, you will miss nearly everything.
Let serendipity take you to new places. Serendipity is finding something better which you weren’t looking for at the first place. You need to allow the serendipitous forces of nature to manifest your desires in whatever ways possible.
In business, planning fallacy is the biggest enemy of progress. Never take long-range plans seriously. Use them for general guidance as long as they seem to be taking you where you want to go, but whatever you do, don’t get stuck with them. Throw them in the trash heap as soon as something better comes along.
Vishal tells me about using serendipity in starting and running Safal Niveshak over the past 5+ years. He has never had a formal business plan, and has let serendipity and “need of the hour” based thinking to guide him. Look at his entire business plan that he shared on Twitter a month back…
My half-page business plan for SN in 2011. I didn't stick to the big idea but, thankfully, to the principles. 🙂 pic.twitter.com/01FYeS6aHG
— Vishal Khandelwal (@safalniveshak) September 6, 2016
It’s easy for new investors to get confused between a sensible investment goal and achieving a specific rate of return. Legendary value investor Seth Klarman, in his book Margin of Safety, writes –
Setting a goal unfortunately, doesn’t make that return achievable. Indeed, no matter what the goal, it may be out of reach. Stating that you want to earn say, 15 percent a year, does not tell you a thing about how to achieve it. Investment returns aren’t a direct function of how long or hard you work or how much you wish to earn…An investor cannot decide to think harder or put in overtime in order to achieve a higher return. All an investor can do is follow a consistently disciplined and rigorous approach, over time the returns will come.
In fact the focus for people, who set out to achieve a specific rate of return, naturally gravitates towards the upside potential and the analysis of downside risk takes a backseat.
To bring serendipity in your investing process, keep your eyes and ears open. Stay vigilant of the businesses and ideas that you come across when you’re not looking for investing ideas.
Getting lucky is less about having good luck and more about avoiding bad luck. And lucky people do that by diversifying. Diversification isn’t just a concept for investing. Used in wider context, diversification means creating multiple options.
You would notice that lucky people always seem to have many ventures going on at the same time. Gunther writes…
Even at the height of success in a major venture such as a career, the lucky man or woman will usually have secondary ventures going or in preparation or under study – sometimes in bewildering variety. An unlucky person is narrowly focused and expects the luck to come in a specific way. A lucky person knows that the more ventures he gets himself into, the better were the odds that some kind of lucky break would come his way.
In the present day, with the democratization of technology, it’s not very difficult to create multiple streams of income.
Like, what skills are you learning to stay relevant in the future? The more skills you acquire, the greater is the chance of finding your niche at the intersection of those skills. Diversify your knowledge. Learn to be good at multidisciplinary thinking.
You never know what seemingly unpromising activity is going to be the one that catches fire for you, argues Gunther, “All you can know is that the more activities you have going on, the greater is the likelihood that something good will happen.”
In investing, adequate diversification is of paramount importance. Having a very concentrated portfolio is a sign of overconfidence. For a small investor, having 10-15 stocks in the portfolio is a sensible thing to do. Less than 10 stocks and you’re overexposing yourself to the risk of serious damages. Remember, avoiding the impact of bad luck is more important than exploiting the good luck.
Well, those were just four ideas and I promised five. Hey, I am just following the third rule of not overemphasizing on goals. I planned for five but realized that top four ideas carry the maximum freight. So why add another low-value item just to complete my original goal?
Remember, none of these ideas will guarantee luck. But they will increase the probability of good luck striking you more often. After all, isn’t luck a game of probability?
In the end, it doesn’t matter how well you practice these techniques, you can still be brought to your knees by a terminal disease, get run over by a truck or struck by lightning. So be grateful for what you have. If you’re breathing, you’re lucky.
Which brings us to the most important trait of lucky people. By the way, if you feel cheated for getting only four ideas instead of five, here’s the fifth one.
Lucky people are those who are able to see how lucky they are.
This realization is the most important step to get lucky. You may not be doing too well at work, but still, have a loving family and good health. Shouldn’t you count your blessings and be grateful for that?