Luck versus skill

In the world of investing, stories abound of overnight millionaires. Take the case of Jiten, who struck gold with his investment in Bharti Airtel. Over the last five years, the share has grown 6x, giving Jiten a sense of expertise in picking shares. It may well be skill, but all too often, it is luck disguised as skill. That Jiten did badly with some other investments is unlikely to change his opinion about his investing skills. Often, the wins are not from a secret superpower. They are just luck. And when we mix up luck with skill, the consequences can be dangerous.

The investing world is full of such examples where random luck often masquerades as expertise. This confusion doesn't just lead to overconfidence; it sows the seeds of ruin. Understanding why this happens requires peeling back the layers of psychology, probability, and market dynamics. There are blurred lines between fortune and finesse, between mere luck and skill.

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I am not downplaying the role and importance of skill. The ability to read the numbers, understand the strengths and weaknesses of a business, and make assumptions about the future of the business is an important one. I am a fan of fundamental analysis; a business needs to have strong performance data to back it up. A growing business with a strong ROCE is likely to perform well over the years. But the share performance itself is driven by several other factors, including the narratives managed by the participants. The performance of a share may, despite the robust performance of the business, be guided by sentiment and general market conditions. But luck? That’s the wild card. So, was the last success down to skill or luck? It is often difficult to tell them apart. Markets move fast, and one lucky call can look like genius.

When a decision leads us to strong gains, our minds play games with us, making us feel awesome. We hunt for proof we were right. And this leads to overconfidence. Overconfidence is not just cocky—it is dangerous. It makes us make bigger decisions. The thrill of being right with the next investment decision is heady. And it does not stop bad decisions. In fact, we start taking many bad decisions.

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Luck is part of the game. The dangerous part? Thinking that the luck you had was all due to your skill. We all try to interpret data; we guess. Sometimes we get it right, and often we get it wrong. And it's very difficult to know if it was all down to skill or just luck.

So the next time you feel like the next Warren Buffett, take a pause. Was it really your brilliance, or just one of the many unpredictable market moves? We will never know.