Second Lieutenant Lamar Gillet was an American hero from World War 2. He was the only pilot flying the inferior P-35 aircraft to shoot down a Japanese Zero in the war. During the early stages of the war, the Zero was the ultimate flying machine, with excellent maneuverability, a very long range, and a kill rate of 12:1. On Christmas Eve 1941, Gillet was flying a mission in bad weather and poor visibility when the Japanese aircraft appeared just in front of him. He opened fire and saw the aircraft crash into the ocean. On the way back to base, he was shot at and his aircraft sustained damage but he was fortunate enough to be able to land safely.
His good fortune continued. While he was sent to another camp as punishment for complaining against the equipment issued, his own camp and his peers were wiped out in a raid. He ended up surviving two and a half years as a prisoner of war in various locations while many of his compatriots died from diseases and torture. To quote him ‘I have wondered all my life why is it that I survived when many others didn’t’. He concluded ‘It is better to be Lucky than Good’.
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As a trader and investor, I have pondered this question long and hard. Is it really better to be lucky than good?
Luck, I would consider to be transient. It is the state of affairs at that particular moment. It is cyclical, seasonal, random and unpredictable. One can get lucky for long periods and have winning trades after winning trades, but eventually, luck will run out. On the other hand, one can be totally down and despite doing everything right, have everything come out wrong. And because the state is volatile, one can be extremely lucky one moment and extremely unlucky the next.
Skill then, is what I would consider to be a trait rather than state. It is stable and cumulative, it is learned and it is definitely not random. Assuming human ability falls generally within a rather narrow band, skill effectively becomes a function of effort. The more effort one puts in, the more practice one gets, the better quality instruction and training one seeks and receives, the more skillful one becomes. Unlike luck, one cannot be extremely skillful one moment and be totally unskillful the next.
Let us try to represent Skill and Luck graphically. On the vertical axis we have Luck represented. Someone who is extremely unlucky would be at the bottom end of the scale, and the luckiest person in the world would be way high up. One could be experiencing short term lucky streaks and simultaneously being hit by unlucky events (imagine someone with many trades open, some doing well while others are reporting losses) or be in a situation where he or she remains devoid of luck for long periods (every single trade he is working on for the past three months is losing money). We all know what it feels like to be in either positions.
And contrary to what many people think, we have no control over our luck. Zero. Zilch. Kosong. Nada.
Rather, what we have control over is our skill level. Making money from the financial markets is a skill, a sport, a game. And like learning how to play tennis, or golf, or chess or even World of Warcraft, the more time spent practicing and enhancing our skill level, the better one gets. The best players train like professional athletes in the single minded pursuit of winning the money game. If someone who has never played tennis before cannot expect to walk into centre court and beat Roger Federer at his own game, how is it possible for anyone who has never traded before to think they can make money and beat these professionals simply by showing up with a newly opened trading account?
Skill is plotted along the horizontal axis. A lousy trader would be positioned all the way to the left. As he picks up new trading knowledge and experience (assuming he doesn’t forget old ones), he moves along the scale towards the right. If he were to start learning a new instrument or trade a different market or invest in a different asset class, he drops left again slightly depending on how similar and transferrable his previous skill set was. Once again, trading and investing skill is within our control, and we will be how good we want ourselves to be.
If we were to put everything together, this is what it would look like
Almost everyone who is new to the game would start off from the left, oscillating between quadrants 1 and 2. Interestingly, many who have started out trading and investing tend to do so with stocks, and given the nature of the markets, they tend to make their first forays during a bull run because that is when all the people around are getting involved. The Fear of missing out an easy chance to make money is just too great. To put it in another perspective, most start investing because they are living in lucky times and easy money. Investors in this quadrant see no need to upgrade themselves and their knowledge and they are happy for things to remain status quo. They are empowered with a false sense of control.
However, Luck is transient and eventually the time will come where they find themselves in quadrant 2. The market starts to turn against them and because they do not have the knowledge and skills to react accordingly, they start to make trades on the hope that the correction is temporary and that things will turn around and revert to what it was like previously. Many get decimated by the market. Some give up. Others realize their inadequacy and decide to up their game and start to acquire knowledge and sharpen their skills.
Investors in Quadrants 3 and 4 bring with them a maturity to the market. They realize that there are things within their control – information gathering and review, risk reward analysis, proper execution, implementing and sticking to their trade plan and stop losses and proper execution of the trade. The realize the importance of constantly learning and improving their edge and moving to the right of the scale. Most importantly, they realize that it is inevitable that they will end up in Q4 occasionally. They just need to persevere and Lady Luck would return. With their Skill to anchor the faith in, it is a lot easier task.
Lieutenant Gillet has been medically screened, carefully selected and throughly trained before he was sent to fly fighter planes for his country in the war. He decided that he wanted to be Lucky rather than Good because in comparison with everyone else, he is already Good. The prayer for more luck is the privilege of someone who is already skillful, otherwise in the Investor Life Cycle it is both a bane and a curse. One can never be lucky forever. Let us bear that in mind and focus on being Good instead!