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Luck or Skill?
The harder I work, the luckier I get.
In a recent NY Times article Jim Collins and Morton Hensen (authors of Good to Great) argue that positive luck has little sustainable edge in business but negative luck can ruin even the best laid plans. They write, “There’s an interesting asymmetry between good and bad luck. A single stroke of good luck, no matter how big, cannot by itself make a great company. But a single stroke of extremely bad luck, or an extended sequence of bad-luck events that creates a catastrophic outcome, can terminate the quest.”
The article is peppered with many interesting examples including a harrowing story about the first day of operation for Southwest Airlines. “During the takeoff run, the right thrust-reverser deployed. Only the captain’s instantaneous reaction allowed him to recover control and make a tight turn for an emergency landing on one engine.” If the pilot wasn’t skilled and lucky Southwest may not exist today.
The history of human progress and civilization is essentially a never ending attempt to assiduously remove as much luck as possible from human affairs. From irrigation, to climate control, to micro surgery to wireless communication we use science to get absolute control over our lives.Yet when it comes to trading, control is illusory at best. No other profession is so vulnerable to luck because no other profession is so dependent on interpreting the vagaries of human behaviour.
Trading in the long run is all about value, but in the short run where most of us operate it is all about sentiment. And sentiment, as we very well know, can change on a dime. That’s why its critical as traders to never take luck to seriously and more importantly to always take your success with a grain of salt. After all if you were a chef, or a surgeon or a plumber your success would be 95% dependent on skill and 5% dependent on luck, but as trader those numbers are vastly different. I don’t think that its a stretch to say that amongst best traders in the world skill is only 50% of your success while luck makes up the rest. For novice traders those numbers are much worse -- probably 90% luck and 10% skill.
Given that formula, it is easy to understand why trading can be so frustrating, but once you realize the role of luck it can be also very liberating. You stop endlessly blaming yourself for losses and more importantly you begin to accept the mercurial nature of the market. That in turn allows you to focus on your strategies and setups allowing you to constantly improve that mix of luck and skill.