I don’t gamble often. I prefer my risk-taking to be less boom-or-bust and my outcomes more predictable…but being a Kentuckian, it’s practically a state law that you have to bet on the Kentucky Derby, so, in accordance with the authorities and my heritage, I oblige.
Several years ago, I decided that, instead of blindly choosing a horse for the sole purpose of having a rooting interest in the race, I’d create a spreadsheet to research and sift through data looking for any historical trends, patterns, or qualities that may be consistent from year-to-year and decade-to-decade, in an attempt to find a predictable pattern for picking the Derby winner (…or for hitting the trifecta). There’s so much data available, there’s got to be a predictable trend, right?
Out of this curiosity, an annual tradition was born, and in year one, I did it…pay dirt. My time and effort paid off. I found the hidden formula, and I won a “not-insignificant” amount of money.
If you have enough data, there’s almost always a historical trend to be found, but there’s a problem with historical trends. They tend to be backward-looking and not always causal in nature. Sometimes they’re just convenient stories and fortunate coincidences we find that happen to fit our narrative and fill the gap in our storylines…and where, in reality, there is only luck, we perceive a newfound skill.
Now, fast forward several years and if you were to track the success of my Derby picks, my hours of research, number-crunching, and trend-following was probably no more effective a strategy than if I had let my kids pick the horses based on their favorite names. Where there was “skill”, now I see the “luck”.
The same principle can be true in investing. Investors who try to be stock pickers or trend followers (i.e. tech stocks in the ‘90s, cryptocurrency, pot stocks, etc.) and try to actively “beat the market” may find short-term success, but a lot of times that success is more attributable to luck than skill (right place, right time). This short-term luck and newfound “skill” create a perceived sense of control, though, that only serves to undermine habits that lead to less risky, more predictable long-term success.
Here’s what caught my eye this week:
MONEY: The 3 Levels of Wealth (A Wealth of Common Sense)
“The company (Slack) was valued at $5 billion after its last round of fundraising, making founder (Stewart) Butterfield a rich man. On a recent episode of How I Built This with Guy Raz, Butterfield was asked how this enormous wealth has impacted his life. He told Raz, ‘beyond a certain level of wealth it doesn’t make your life any better.'”
LIFE: The Errors That I Don’t See (Of Dollars And Data)
“With 2.5 billion GB of information being created each day, we have to continually ask ourselves, “What information can I trust?” This is why becoming a purveyor of signal in a world drowned by noise is the ultimate reputational asset. With it, you will easily be able to differentiate yourself from your peers. How do I know? Because most people don’t check anything.”