A Random Case of Luck
If it weren’t for bad luck, I’d have no luck at all. I’m slightly exaggerating. It really isn’t all that bad. Though I have been a little preoccupied with the concept of luck. Or randomness. Particularly when it comes to business and investing. Randomness, luck, or whatever you want to call it, has shattered my worldview: “The harder I work, the luckier I get.” But, are we all just spinning our wheels here? By now you’re probably thinking; “OK Debbie Downer, get to the point.” My point is this: Do we put too much weight on skill, when in fact a large portion success really comes down to random luck?
We all want to model success. We seek intelligent imitation of our heroes: Buffett, Munger, Gates, etc. Right down to their morning routines, and even as far as what they ate for breakfast. We especially want to know what they’re reading. Anything for that edge. Yet, even with our heroes, we can point to a pivotal moment easily described as random luck. For instance, when a 20 year old Warren Buffett came to Washington, DC to visit GEICO. Buffett arrived in Washington on a Saturday morning and found the doors locked. He pounded on the door, and finally a janitor let him in. There he met Lorimer Davidson, who answered all Buffett’s questions on the insurance business in general and the competitive advantage of GEICO in particular. Buffett says that afternoon changed his life. And the rest, as they say, is history. Would Buffett still be Buffett without this twist of fate?
Yet we still seek a blueprint. We want to believe there is a system or process that will improve our own odds of success. I was at the Casino in the Kempinski Hotel, Djibouti. I’d never gambled before. I observed a guy sitting at the bar who would go over to the roulette table and drop down $500 and walk away with $1,000. He did this time and time again, all through the night. So, naturally I asked him about it. He said he’d wait for five reds or blacks in a row and then swoop in and bet $500 on the opposite color. If he lost, he’d double down. He claimed it never went over the same color seven or eight times in a row. He was always a winner eventually. Over the course of the following week I managed to turn $800 into $3,200 using his ‘system’. I was beyond delighted. I shared my new formula with an acquaintance who happened to have been the Captain of a Navy Nuclear Submarine. In other words, a really smart guy. He explained regardless of how many times a color came up, the next spin was always 50/50. The odds didn’t change. (Well, slightly less since there was a green 0 and 00) Needless to say, my system wasn’t a system at all, and I never gambled again.
This was luck, pure and simple. Luck that I made some money, and luck that I ran into a guy who could explain to me why the system wouldn’t work long term.
But that’s just gambling. Surely we can model success in the business and investing world, right? We’ve got some compelling research out there. In Search of Excellence, Good to Great, and other books like the Outsiders. This illusion too was shattered in a paper by Mumtaz Ahmed, Michael Raynor and Andrew Henderson called “A Random Search for Excellence” To illustrate, they use a story from MIT Professor Rebecca Henderson, which shows how easily our intuition can be fooled. She begins her course in strategic management by asking all the students in the room to stand up. She then ask each of them to toss a coin: if the toss comes up “tails” they are to sit down, but if it comes up “heads” they are to remain standing. Since there are around 70 students in the class, after six or seven rounds there is only one student left standing. With the appropriate theatrics, she approaches the student and says “HOW DID YOU DO THAT??!! SEVEN HEADS IN A ROW!! Can I interview you in Fortune? Is it the T- shirt? Is it the flick of the wrist? Can I write a case study about you? …
So, if it’s all just random luck, should we just throw in the towel? Let the chips fall where they may? No. We plod on. One foot in front of the other. My plan is to acquire pieces of great businesses at a fair price and hold on for the long term. And maybe luck will find us. As Jim O’Shaughnessy says, long term thinking is the closest thing to a superpower and investor can have.
