“Chance favors the prepared mind” is a famous truncation of a Louis Pasteur quote.
A few days ago I mentioned that my wife just purchased Max Gunther’s 1977 reissued “Luck Factor” book. The subtitle of the book is “Why some people are luckier than others and how you can become one of them”. That’s worth exploring.
Chance does indeed favor the prepared mind, but all successful people acknowledge that luck is an influential factor in all their careers. Final positive and negative results often pivot on unforeseen factors that ultimately tilt the outcome in one direction or the other.
The military likes to talk about force multipliers. In everyday happenings, luck is a force multiplier. Folks who have studied both lucky and unlucky people have concluded that a person’s luck quotient can be augmented. Gunther offers several personal attributes that can be sharpened and actions that can be practiced that could enhance one’s luck quotient.
Gunther identifies four Luck Adjustment elements: the Spiderweb structure, the Hunching skill, action Boldness, and the Ratchet effect.
When applied to investing, the Spiderweb structure is an expanded number of financial contacts with divergent knowledge and interpretations. The MFO website and its membership serve to satisfy this need with its complex network of folks who volunteer information and meaningful guidance.
The Hunching skill deals with accepting the fact that we know more than we can immediately recall to form a cogent decision. At the decisive moment we feel that some decision is warranted, but we can not cobble together a precise logic chain to support that decision. Our subconscious stores data at various locations that can not be instantaneously accessed, but it’s there based on earlier learning and experience. We have a vague and clouded memory of it, and it forms the basis of our feelings, the source of our Hunch. Gunther recommends taking action on that Hunch.
History demonstrates that boldness is frequently rewarded. The bold enthusiastically seize opportunity when it is presented. The lucky seem to be bold; the unlucky seem to be timid. However, intemperate boldness can lead to faulty decisions and disastrous outcomes. Gunther emphasizes that boldness must be coupled to avoiding rashness. The investor must do a balancing act in terms of the risk-reward tradeoffs.
An investor recognizes that outcomes are uncertain. Total prescience is an impossible criteria when making an investment decision. Here’s where a probabilistic grounding that uses statistical databases can improve an investor’s luck quotient. It is prudent to prepare a safety net to accommodate unexpected events and unhealthy investment payoffs. Gunther names this the Ratchet Effect. He recommends that investors should be willing to admit an investment error, and be prepared to sell at some predetermined loss, like 10 % or 15 %. Any investor should have sufficient financial reserves to easily sustain these relatively minor disruptions. Never invest with grocery money.
This summary of Gunther’s Luck Factors takes us full circle to Pasteur’s chance favors the informed mind aphorism. What constitutes an “informed mind” for profitable investing?
I admire the financial works of Bill Bernstein. He had at least a partial answer to that question in his 2010 book “The Investor’s Manifesto”. Bernstein argues that most investors are doomed to fail (underperform the markets) because they, with a small percentage excepted, do not possess the requisite abilities. What are these requisite abilities?
Bernstein lists four: (1) a dedicated and continuous interest in the investment process, (2) a little math horsepower that includes some limited statistical and probability capabilities, (3) a historical perspective starting with the South Sea bubble, and (4) an emotional discipline to stay the course with a carefully crafted plan. He claims that Wall Street is littered with the bones of folks who knew what to do, but failed to do it. Execution is mandatory.
Much of what Bernstein says in his Manifesto couples tightly to the findings that Max Gunther summarized decades earlier. Fortune does not smile equally on everyone, but the odds for that winning smile can be enhanced with preparation, patience, and persistence.
Here are a few quotes that I culled from Bernstein’s book that reinforce some of Gunther’s work on the subject.
"The goal is not to maximize the chances of getting rich, but rather to minimize the
odds of getting poor." That’s the control risk axiom.
"Very high returns are almost always made by those brave enough to invest when
the sky is blackest." It’s tough being a contrarian, but the payday is huge because of the regression-to-the-mean market pull.
"Nothing is as likely to destroy your financial future as your own emotions." This is a caution against the (mis)behavior biases.
And finally, a brutally frank condemnation:
"The average stock broker services his clients in the same way that Baby Face
Nelson serviced banks." Bernstein has surely earned the privilege to slam an industry, but the criticism is far too broad for my comfort zone. I pass on this one.
You might want to read both books. They are breezy and easily read. I enjoyed both volumes, but not surprisingly, I was more impressed with the Bernstein effort because it contained an abundance of historical and statistical data. Enjoy.