Luck, Timing, and Skill–How Good Are You?
Imagine Jim and Pam both live in D.C. and have a dinner meeting in Charlotte at 6pm. Since Pam does not like Jim’s choice in music, they decide to drive separately. Driving at an average speed of 65mph, it should take 6 hours, so factoring in a stop or two and adding in a margin of safety, they both decide to leave D.C. at 11am for a total trip time of 7 hours.
Jim has a lead foot and enjoys the thrill of driving fast – he gets a real rush from feeling the acceleration and speed of his red sports car. He averages 80mph, spends most of his time in the left lane blinking his lights at people to move out of the way, and arrives at 4pm, two hours early for the meeting. So, he chills out for 2 hours in the parking lot.
Pam is a rule follower, and she has no interest in getting a speeding ticket or having an accident. She enjoys the nice smooth ride of her modest vehicle with its comfortable seating and 28 cupholders. She averages 65mph and arrives at 5:20pm with plenty of time to spare and parks next to Jim.
“I got here at 4pm, I was making great time!” Jim excitedly announces as Pam walks over to him.
“How fast were you going?” Pam asks.
“Like, 80!”
“So, what did you do for 2 hours?” she taunted.
Jim looks down at his feet and says, “Nothing.”
With her hands on her hips, she responds, “So you risked getting a ticket or having an accident just to get here 2 hours early just to do nothing?”
“Yes, well, I’m an excellent driver!”
“I didn’t know being an excellent driver made you impervious to speed traps and accidents!” she chuckled.
“Well, I guess I proved it does!”
At this point, you know what I’m getting at – not getting a ticket and/or having an accident has a lot more to do with luck and timing than skill. There are simply too many variables outside of a driver’s control to say it’s all skill.
The real shame here is Jim increased his risk and didn’t accomplish anything productive as it relates to the purpose of his trip…being on time for the dinner at 6pm.
TAKEAWAY – If you take the time to plan out the purpose for your money (having a dinner at 6pm), figure out how much time you need until you are going to use the money (the 6-hour drive with an hour cushion), and establish a conservative rate of return (your average driving speed), you can manage risk by setting the cruise control and having a safe drive to lower the probability of unplanned setbacks (getting a speeding ticket or worse, having a major accident) impacting long-term goals and objectives.
Getting more return (going faster) for the sole purpose of getting more return (going faster just to be going faster) or because you believe more is better (more return is better than less return) only serves to overfund for your goal (arriving at 4pm).
Determining the appropriate level of risk requires people to first answer the question, “What’s the money for, and why are you investing?”
For most of us, the answer is to fund the expenses associated with a chosen lifestyle, and to the extent there is money left over at death, providing family and friends with an inheritance and/or funding charities, all while minimizing taxes.
The answer should never be “to win” or to try and become the greatest investor in the world. Is it fun to see days where your portfolio crushes the market? Of course. But we also need to recognize that nobody is going to beat the market every single day, week, month, or year.
The good news is this – you don’t have to be in the stocks that are doing the best today in order to have a great portfolio that meets your long-term goals and objectives.
Save your gambling for Vegas and stop listening to your neighbor who loaded up on Tesla for some reason and is up hundreds of percent today.
Gambling is a form of entertainment. Treat it as such and do it in a casino with a “loss budget”.
And as for your neighbor…they are playing a totally different game than you are. PLAY YOUR OWN GAME.
Knowing what your portfolio needs to return over the long-term and having a process to manage the investments is the key to limiting reliance on timing and luck.
Momentum, luck, and timing come and go, but when they go, those who bought last will lose. Focus on your goals and assess if your portfolio is on track to achieve them.
An investment process and a long-term strategy are some of your best friends here.
Keep looking forward,
Dave
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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument.
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.
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