Luck and Risk

When you win, it’s skill but what happens when you lose? You got unlucky.

It’s a daily battle amateur traders go through.

The hard truth is:

• Every investment you’ve ever made involves luck
• You’re lucky if you have one less chromosome

My main man Warren Buffett has a theory called the ‘Ovarian Lottery’ which gives a good framework for above:

“I’ve had it so good in this world, you know. The odds were fifty-to-one against me being born in the United States in 1930. I won the lottery the day I emerged from the womb by being in the United States instead of in some other country where my chances would have been way different.

Imagine there are two identical twins in the womb, both equally bright and energetic. And the genie says to them, “One of you is going to be born in the United States, and one of you is going to be born in Bangladesh. And if you wind up in Bangladesh, you will pay no taxes. What percentage of your income would you bid to be the one that is born in the United States?” It says something about the fact that society has something to do with your fate and not just your innate qualities. The people who say, “I did it all myself,” and think of themselves as Horatio Alger — believe me, they’d bid more to be in the United States than in Bangladesh. That’s the Ovarian Lottery”

The Ovarian Lottery can be applied to Trump deporting foreign college students because of the virus. Otherwise, they’re required to attend on-campus classes. During a pandemic, where people shouldn’t be gathering in crowds. They’ve since ended that dumb plan, but it’s rallied things into perspective for me.

Here’s why I’m luckier than a foreign student:

• I was born in Canada.
• Had a Botswana childhood with a Canadian citizenship
• That passport got my parents a PR card
• My entire high school experience was Canadian
• Right now I get a 50% discount to a University degree, compared to my Botswana pals with no Canadian passport

Decent investors can sense and accept randomness. For example, suppose you’re checking your Instagram stories and notice your buddies hanging out without you. Two theories:

• They made plans behind your back and posted that story deliberately, to spite you.
• A series of separate events happened to lead both of them into meeting up.

To use a term from Howard Marks, a first-level thinker will rationalize the former; whereas the second-level thinker will assume the latter. These are the people with good judgment (also the ones you should have your investing conversations with).

So, how does one get lucky?

Taking risks is how luck can find you.

Think of luck as a locked door. And risk as a random key that may or may not fit in the key-hole. The chances of you unlocking the door are proportional to the amount of keys you produce.

I don’t advise taking lots of risk. Just the one that’s more likely to unlock the door. The right type of risk.

So, how do you know a good type of risk?

That answer is simple: be a second-level thinker. Improved judgement by understanding luck and risk, instead of underestimating them.

So, how can we understand luck?

Here’s my favourite explanation of luck:

The Roman philosopher Seneca once said, “luck is what happens when preparation meets opportunity.”

Microsoft is the product of this. Bill Gates had to code a computer program to manage his high school’s scheduling system. That was an opportunity that prepared Gates for Microsoft. Here’s his take on it:

“They could have hired an outside computer expert to do the scheduling system. Teachers could have insisted that they teach classes on computing, simply because they were the teachers and we were the students,” Gates says. “But they didn’t.”

As a result, he says, “if there had been no Lakeside [high school], there would have been no Microsoft.”

Preparation meeting opportunity.

You see this in startups too. A team of developers will spend time building a product. Long term, gradual improvements lead to market discovery; and the company takes off. Yes, Apple and Tesla; but a better example would be the thneed from the Lorax, by Dr. Seuss.

So, how can we understand risk?

Here’s my explanation of risk:

There’s good and bad risk. One pays off while the other defaults.

Good risk is when execution meets preparation; after an opportunity arises.

During the 2008 housing crisis, Howard Marks’ fund invested 10 billion dollars in roughly 16 weeks. An average of $650 million per week. They were cautious before the crash and aggressive after it. Main man Marks prepared by waiting; and executed when the opportunity presented itself. He took a good risk.

The 2020 crash has birthed many amateur traders with no preparation; but lots of opportunity. That’s bad risk.

So, what’s the bottom line?

Define luck and risk yourself. Frame that in the decisions you make. Avoid taking bad risk. Take good risk and have luck find you.

Another bottom line would be signing up for my weekly newsletters if you’re interested.