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Sunday, June 28, 2015

Process and Outcome, and the role of luck in investing kcchongnz

I was in a guided tour trip to USA when we stayed overnight in a casino city of Laughlin (note not laughing) in the year 2000. A group of us played some Black Jack in the casino for some fun. You know there you could bet $5 for a hand then and you have free drinks. There was really a lot of fun when your “comrades” on the table shouted “Picture, picture, picture” for you when you have 11 points in your hand. One of the ladies in the group was having a streak of good luck and she had been winning quite a lot of money, may be a couple of thousand dollars. In our last bet, bigger one, she had a hand of eighteen and she asked for another card. Everyone was shouting “three, there, three” for her. And sure enough, she got it and got 21 points, or Black Jack. The house, after having to take another card, was 20. What a great hit for her and everyone, including me (before I knew or thought about probability and expected outcome in investing), congratulated her and praised her for such a great Black Jack player. In the journey back to San Francisco, she was talking non-stop about how clever that she had decided to take the extra card, and she was practically “laughing all the way to the banks”.

Luck in the stock market
“Luck is a combination of circumstances, events, etc., operating by chance to bring good or ill to a person.”

In the stock market, you often hear players making millions of Ringgit, 60% in half a year, 500%, 700%, or even 1000% return from Bursa in a year; even in months punting hot stocks. They will brag about how they have made those extra-ordinary return by the use of margin financing, or other people’s money (OPM), to make the exaggerated return, and at the same time, encouraging others to do so.

Ha ha, go and invest in your BAT and Nestle for your 10% return with the meagre saving you have. I made millions using other people’s money in such a hot stock. You take 30 years to make what I can do in a year. You are not in the same league as me.”

That was how they scorned at me. I have to console myself often that

“Even if everyone is making big money, and I don’t, it is ok”

That “hot stock” was traded at 55 sen a year ago, closed at 18.5 sen two days ago on 26th June 2015. It had since lost more than two thirds of its value now. But seriously, many people would tell you they have made tons of money, but how many would tell otherwise and lost their underwear?

Many would tell you they speculated in KNM and made a fortune when its share price ran up from 40 cent to more than RM1.00 in a few months a year or two ago, and how many told you they have lost a bundle when its share price plunged from RM1.00 back to 40+ cent, also in a matter of a few months and now at 63 cent? And how many told you that they bought it at RM10 eight years ago and had lost more than 90% now?

Instead, they would cite those phrases below convincingly and relentlessly.

“Success is never accidental”
“You make your own luck”
“Luck is what happens when preparation meets opportunity.”

In reality, luck plays a much greater role, especially in short-term investment results than many investors may think, though skill may play a role as implied by those phrases above.

Does skill matter?
“Skill is the ability, coming from one's knowledge, practice, aptitude, etc., to do something well.”

Yes, skill, or rather following a proper proven successful process in investing which is in a probabilistic field, does play a part, a major part too especially in investing in a much less efficient market as that of Bursa compared to the US markets, in my humble opinion.

One way we can judge from a process is a good one in investing is to see if it worked in the past and is it analytically sound. For this, I would like you to revisit my previous articles in i3investors:

  1. Why value investing works?
  1. Graham net net working capital value

  1. The Magic Formula

Process and outcome from my portfolios