Luck and how to earn it

 

I have often said that luck is a lazy man’s excuse for failure and a modest man’s excuse for success. I concede, however that this is not the full story.

 

What I should say is that luck is a feeble explanation of chance - in other words, pure statistics.

Frequently in my work, I see different interpretations of luck. From the unexpected win in a prize draw to the sudden collapse of an account-holding bank, people invariably associate their financial well-being (or lack of) to luck. This implies that our actions have no bearing on the outcome. Can this ever be true?

 

A friend of mine had an accident on his bicycle and hit his head on the road, smashing his cycle helmet. Another friend was heard to say, “It was lucky you were wearing your helmet!”

I disagree.

 

It was a very sensible decision to wear that helmet. Protective gear reduces the chance of serious injury in case of an accident. In the same vein, a sensible investor will add protection to reduce their chance of financial loss in a crisis and diversify to increase their chance of growth in various markets.

 

If I never enter a prize draw, my chance of winning is zero. If I invest all my money in one asset class, be it real estate, gold or any other, my chance of losing a significant proportion of my savings is very high when, inevitably, the market eventually falls.

 

Diversification is wearing that cycle helmet. Every extra precaution an investor takes will give them a statistical advantage in adverse conditions. Different asset classes, different financial institutions, jurisdictions, timescales, levels of capital protection. These are like wearing knee-pads, sticking to cycle paths, not running red lights and every other ‘just in case’ one can imagine.

 

So, if avoiding bad luck is just a case of precaution, how do we generate good luck?

Naturally, we need to increase our statistical chance of success. The more tickets I buy for prize draws, the more likely it becomes that I will win a prize. Further than that, I could find the competitions with the fewest entries and choose only to enter those ones, thus increasing my chance.

 

Preparation is key. Background research and professional help is invaluable. You might wish someone good luck when they go to a job interview, but you know very well that the outcome will depend entirely on their experience, qualifications, preparation and performance in the interview. Luck will have no part to play.

 

In the recent financial crisis, most people lost money. The vast majority of investors suffered when the crash tore through global equity markets. The ‘lucky few’ that benefitted from the crisis made a fortune. The way they generated this luck was by elimination of emotion and understanding that, while people make choices, mathematics gives the result.

There is only one absolute in investing: If things are going up, they will go down. If things are going down, they will go up. If this pattern of boom and bust ever stops, capitalism will come to an end. The trouble arises because most people will see when others have made a lot of money and choose to follow suit or see others losing and choose to disinvest. By then it is too late. You are stacking the odds against yourself. By following the herd, you are doomed to buy high and sell low. You will never win.

 

It is absolutely necessary to take a chance and trust in the statistics. If you cannot do this, your portfolio manager or financial advisor should be doing it for you.

 

The often-quoted Thomas Jefferson once said, “The harder I work, the luckier I get.”                  

He had a good point, but nobody has time to do the hard work in every single aspect of their life. That is what professional help is for. In every field, from fitness to accounting, professionals exist to charge a fee for increasing your chance of success. Therefore, you can buy luck. The harder they work, the luckier you get.

 

I do not believe in luck. I believe in statistics and hard work. You might call a positive outcome luck or you might call it a job well done. In any case, precaution, preparation and a little presumption will make you luckier than most in the long run.

 

 

About Edward Mainwaring-Burton

 

Edward Mainwaring-Burton is Senior Financial Planner at Acuma. With many years’ experience as a top wealth manager in Geneva, the world's leading private financial center, Edward is an expert in individual forward-planning and private portfolio building. He meets clients by introduction only and works with Acuma Dubai as a specialist in pensions and retirement structure to advise individuals on nationality-specific investment solutions and financial security.

 

 

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