Howard Marks, the veteran hedge fund manager at Oaktree Capital, has just published a new memo to clients titled “Getting Lucky.“
As the title would suggest, the memo offers an extensive discussion of the important role of luck plays in everyday successes.
“There’s no doubt that hard work, planning and persistence are essential for repeated success,” writes Marks. “But even the hardest workers and best decision makers among us will fail to succeed consistently without luck.”
The memo is pretty exhaustive, and it’s certainly worth reading. However, his thoughts are summed up nicely in this excerpt:
The first thing I remember learning at Wharton in 1963 was that the correctness of a decision can’t be judged from the outcome. Because of the randomness at work in the world and the unpredictability of the future, lots of bad decisions lead to good results, and lots of good decisions end in failure.
In other words, for an investor to both be right and make money:
— his view of what will happen in the future — and what should be done about it — has to be analytically correct a priori,
— the things he thinks will happen have to actually happen, and
— those things have to happen on schedule.
But in investing, it’s hard to know what will happen and impossible to know when it will happen. Many things influence performance other than (a) investors’ hard work and skill and (b) the market’s dependable discounting of information about the future. Luck — randomness, or the occurrence of things beyond our knowledge and control — plays a huge part in outcomes.
Investment success isn’t just a question of whether the investor put together the “right” portfolio, but also whether it encountered a beneficial environment. Thus being successful requires a significant degree of luck. No one gets it right every time. (That’s why even the best investors diversify, hedge and/or limit their use of leverage.) But the skillful investor is right more often, over a long period of time, than an assumption of randomness would permit. We say about such investors, “it can’t be luck.”
It’s remarkable that someone as successful as Marks is willing to admit that much of what he has accomplished is due to luck. Perhaps, it is the recognition of the role of luck in investing that is indeed a skill in itself. Whatever that means.
Read the whole memo at Oaktree.com.