Types of Luck and How They Relate to Investing

This blog's content was taken from episode 255, "Why Buy / Sell Ratings on Stocks Don’t Matter"

You can go check out the whole episode here:

In 2007, Andreesan Horrowitz wrote a piece called Luck and The Entrepreneur: the 4 Kinds of Luck. Let’s go through these and what they can mean for investors.

1) Blind Luck

Blind luck is simply random chance.

You threw a dart at the list of stocks board, picked it, and it went up. You threw a dart at the board of 2000 stocks in 2003 and it just happened to be Microsoft. No skill, just pure luck. Right place, right time without any pre-existing effort to make sure you set yourself up for success.

2) Motion

“A certain basic level of action ‘stirs up the pot’, brings in random ideas that will collide and stick together in fresh combinations, lets chance operate.”

Motion brings you luck based on pure activity. You’re actively trying to have more collisions with luck. You’re putting yourself in situations for luck to strike. This can be seen as going from spinning the wheel of stocks to actively researching great businesses to hold for a long time and putting in a base level of effort to win. But the motion is random and therefore, there is still a lot of luck involved.

3) Recognizing good fortune

Recognizing good fortune is about having a unique and differing perspective.

You recognize that you are the one to take advantage of this opportunity. Luck has given you the opportunity, but your preparation has given you the ability to act on it when others cannot. It is your unique perspective.

For example, you’re a retail floor worker at Lululemon in 2006. You realize this company is operating on a different level. The demand from customers is relentless and everywhere in the mall is dead but not at Lululemon. The stock is getting smoked after IPO because they went public right into the great financial crisis where they lost 75%. But your store alone tripled sales since then. You buy Lululemon stock with your unique perspective against the grain of wall street and go on to make 75x of your money.

4) Directed motion

The three previous types of luck exist because of random opportunities of luck presenting themselves to you. Directed motion is encountering good fortune because motion is now directed and not random.

This is skating to where the puck is going, this is creating your own luck. This is directed motion where opportunities begin presenting themselves directly because of the effort being done.

For example, creating a proper investment checklist. A proper idea generation framework, the right tools and tech to help you analyze stocks and stay on top of your portfolio holdings tools like Stratosphere.io. 

There is a reason as to why great investors have checklists, framework tools, and rules to manage their investing style. They are prepared and directing motion towards encountering good fortune.

This additionally relates to investing because the longer your time horizon, more sophisticated research and skill as an investor more and more of your luck and portfolio return decomposition will come from the types of luck further down the list. From directed motion, not blind luck.