My near and dear ones might be surprised to find a post by me on HOW to GET LUCKY. Being an atheist, for long I have the denied role of luck or gave it much less importance than I should have. I don’t remember what exactly changed my opinion. But I do remember that when I read Malcolm Gladwell excellent book Outliers: The story of success, somewhere around 2009, it had significant impact on me. That book made me to realize that the professional success which I was enjoying till then, was also due to the fact that I was working under an analyst who was ready to give me much more independence and opportunity than available to other colleagues in my office.
“How to get lucky” helped me to understand so many concepts about luck better. As usual, I came across this book in one of the presentation of Prof. Sanjay Bakshi. The underlying message of the book is not to deny the role of luck in whatever we do. There are many ideas in the book, I am sharing few ideas, which I liked most. Unless otherwise stated, words in italics refer to extracts from the book “How to Get Lucky”. I also read another book The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael Mauboussin. With due respect to Michael Mauboussin, I found How to get lucky much more easy to understand. Michael’s book is highly technical with lots of statistics and data.
Worst-case analysis – be prepared for catastrophe
I know this situation can go wrong. Now I’ve got to ask how it can go wrong. What is the worst possible outcome? Or if there are two or more ‘worst’ outcomes, what are they? How can it go wrongest? And if the worst does happen, what will I do to save myself?
We should factor in worst case scenario without suffering from Availability Heuristic. But as observed by Cass R.Sunstein in this article “people badly under-react to worst case scenarios”. He identified three reasons for that 1) Unrealistic optimism 2) Whether related events come to mind 3) Motivated reasoning
[Tversky and Kahneman explained in 1973, we assess the frequency, probability, or likely causes of an event by the degree to which instances or occurrences of that event are readily “available” in memory. And, of course, if something is not available in our memory, we simply cannot assign a weight to it so we leave it out of our decision-making process, leading us to make bad judgment calls.]
Before making investment in any company, its important for anyone to make sure that even in the worst case scenario, one will not incur PERMANENT LOSS OF CAPITAL and expected return is positive. As explained here, for delisting situations, worst case scenario should be withdrawal of delisting and one SHOULD NOT ASSUME that one will be smart enough to exit before opening of reverse book building.
Importance of Risk –Reward ratio
That [not understanding risk-reward ratio] is a recipe for poor positioning in the world of luck. It is essential to study risk-reward ratios. When a given risk is small and a potential reward large, you might as well take the risk and so position yourself to become a winner.
There are two ways to be an almost sure loser in life. One is to take goofy risks; that is, risks that are out of proportion to the rewards being sought. And the other is to take no risks at all.
All decisions involve some uncertainty……
Lucky people, as a breed, are able to live with the knowledge that some decisions will turn out wrong. This is part of their general habit of accepting risk. “You take risks going in and you take risks getting out. If you were to insist on 100% certainty, you would not be able to make any move.
Dr. Ben Carson [Yes, he is a doctor and not an equity analyst] highlighted the same point in his excellent book Take risk
All my life I’ve observed two groups of people who have made serious life-impacting mistakes in their approaches to risk. First are those people who sadly are so afraid to take any risk that they never actually manage to do anything of true significance in their lives. Second are those individuals who take all the wrong risks and tragically end up hurting or destroying themselves or others in the process. Lives are ruined either way, and both groups fail to reach their potential. They never discover or enjoy the true purpose for which God placed them on earth.
Related to risk-reward ratio and worst case analysis, I am reminded of the risk matrix suggested by Dr Ben Carson in his wonderful book Take risk.
“Whenever I face a hard decision or a risky situation in life (personally or professionally), all my thinking, all my analysis, all my planning can be boiled down to four simple questions:
1) What is the best thing that can happen if I do this
2) What is the worst thing that can happen if I do this?
3) What is the best thing that can happen if I don’t do this?
4) What is the worst thing that can happen if I don’t this?
One of the good example of risk-reward ratio was Aeonian Investments, in which losses was capped but upside uncertain.
If you lose your job because of events that are not of your making, the unhappy episode may knock you down but needn’t knock you out. It needn’t, that is, as long as you see clearly that what has happened to you is only a case of bad luck. But if you automatically assume that every bad thing that happens to you is in some way your own fault, then bad luck will almost always become worst luck.
All this was a typically lucky reaction to adversity. The unlucky personality would seek just one way out of a hole – the obvious way: “I gotta find another job!” But Darrow’s reaction was more likely to bring success. His thinking went something like this: “It would be nice to find another job. I’ll try. But in case I don’t run into good luck along that route, I’d better look for luck in some other directions at the same time.”
Similar advice is given in the excellent book “The Gift of Job Loss”
Don’t push the ocean” is the favourite saying of a friend of mine. What she means is that when things are leaning a certain way, maybe it is for a reason. Instead of going against the tide, ride the wave. Maybe she was right. My brain started to work overtime. A mix of thoughts seemed to come to the surface, not very well aligned, uneven, nagging, and not making too much sense at first. The idea of taking some time off, of not fighting the potential job loss but embracing it with vigor, was slowly nesting in my head. Like a ray of sunlight parting the clouds, my gloom started to dissipate.
“Gift of Job Loss” is very close to my heart. I read this book immediately after I lost my job in Nov 2011 and it helped me to think rationally.
Process vs outcome
Never confuse luck with planning. If you do that, you all but guarantee that your luck, in the long run, will be bad.
Avoid learning false lessons from random events….
When outcomes are brought about by random events that are not under anybody’s control – events that we would define collectively as luck – then you must be very careful in determining what lessons may be drawn from them. The habit of deriving false lessons from life’s random happenings is a trait of the unlucky.
To read the same thing in the words of James Montier and Michael Mauboussin read here
On Importance of networking
But he could know that his chances of getting a break improved in direct proportion to the number of people he knew. The lucky personality gets to know everybody in sight: the rich and the poor, the famous the humble, the sociable and even the friendless and the cranky. Whether you aspire to get into the movies or simply get a higher-paying or more exciting job, the rule is the same. Go where events flow fastest.
But it does not mean you have to know EVERYBODY …..
This doesn’t mean you have to be one of those Personality Kids who know everybody in town. We can’t all be the life of the party. Some of us are quieter than others. But we can all go around with a look and attitude that says we want to be friendly. We can stay active. The worst thing you can do is withdraw from the network of friendships and acquaintanceship at home and at work. If you aren’t in the network, nobody is ever going to steer anything your way.
But why is she in the right places at the right times?….
Because she has made the effort to be in many places at many times. Fate has given her a lucky break, but she has earned it. She has positioned herself for it.
Don’t speak unless you absolutely must or you may regret it later
The chronic loser buys some stock and blabs to his or her spouse, explaining all the reasons why this investment is so nifty. Bad luck obtrudes. The stock price plunges. This is the time when the speculator ought to apply the Fifth Technique, luck selection. The venture has soured, so it is time to discard bad luck before it becomes worse luck. It is time to sell out. But the loser, being a loser, has communicated too much. Now the spouse is jeering. “You sure know how to pick them! Wow, what an expert! This nifty investment has cost us 6,000 bucks so far. Boy I hope it doesn’t get any niftier!” The loser finds it impossible to say “I was wrong.” Instead, he is forced to take a stand: “This is just temporary, I tell you! Just wait. I’ll be proved right in the end!” And down the drain go the talky two. Since life is ruled by luck and you can never predict what actions you will need to take, it is best to say as little as possible about what you are doing and thinking. Then, when action is required, the only person you must argue with is yourself. That is often tough enough.
This doesn’t mean you must turn yourself into a stone statue…..
They are particularly careful when talking of subjects that have great personal importance to them. They reveal no more of their thinking than they have to. They don’t lock themselves into positions where there is no good reason to do so.
Mohnish Pabrai advises not to discuss one’s current holding widely for the same reason
If investors get in the habit of discussing their investments they may end up suffering from commitment bias. If they constantly talk about how great a company is, they may suffer from a bias that could impair their judgment.