The stock market, like everything else in the world, is all about risk. While it may seem like luck plays a role when you’re making money, at some point, it needs to be skill-based. The question is, what is more important in investing: skill or luck?
There is an element of luck at play in the stock market. Of course, skill and hard work will play a part in your success, but other factors such as timing and luck also play a part in a stock’s performance. For instance, there are times when stocks go on streaks and outperform themselves. This can be attributed to pure luck if you happen to have one of those stocks in your portfolio at that time.
Although most people grasp the concept of investing, it is critical to recognise that it demands skill. It is never enough to only learn the fundamentals or read literature on investing; an investor must have crucial investment skills to be good at investing, such as sound judgement, research and analytical abilities. Possessing the right skill set and mentality allows you to make decisions that result in greater profits on a recurring basis.
Skill helps you make smart judgements and get a good result, and luck is what gets you a great result even if you have made poor or average choices. They both occur because the world is too complicated for your efforts to determine your results with absolute certainty. Luck and skill can be considered as siblings, motivated by the same motivation to help you, the investor, earn more.
Consider this: you are just another player in a game with 7 billion existing players. So, the consequences of other players’ moves might be more influential than your actions. Your luck or skill won’t help you if the moves of other players change the momentum of the game. This is where identifying your risk appetite comes into play.
Facing risk helps you understand that certain things are beyond your influence, which is useful feedback for adjusting your investment plan as well as your current portfolio. However, having good fortune does not. It provides the opposite input: a false sense of control since you achieve the desired result regardless of your performance. This can be harmful if you are attempting to make smart, consistent long-term judgements. Facing risks also helps you to sharpen your skills even more. You don’t have to be a genius to make good investment decisions, but you need to have the right skills and mindset.
Between the relevance of luck versus skill in investing, having the necessary skills gets the nod. A significant amount of work is expended in detecting and controlling risk while investing. On the other hand, there is so little work put into the same for fortune. Risk managers are hired by investors; nobody hires a ‘luck advisor.’ Businesses must identify risks in their yearly reports, but they are not obliged to reveal fortuitous breakthroughs that may have contributed to earlier performances. There’s a reason the term ‘risk-adjusted returns’ exists, but the term ‘luck-adjusted returns’ does not.
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