Luck, Skill, and the Power of Patterns: Navigating the Uncertain Waters of Investing

Nov. 3, 2023, 9:22 a.m. |Mindset |Beginner

Investing can sometimes feel like a wild and mysterious journey, where surprisingly, those with less formal education and fewer connections can outshine the pros with all the proper credentials. A recent article dated October 23, 2023, "Who You Calling Dumb Money? Everyday Investors Do Just Fine," from the Wall Street Journal, paints a vivid picture of this, revealing how average individuals, with their stock portfolios, have managed to beat the S&P 500's performance since 2014.

Pigs with Wings

This article talks about something interesting: regular people who invest on their own seem to be doing better than the big market averages since 2014. Usually, experts think that everyday people don't make the best investment choices. They even have a nickname for them: "dumb money." But looking at how well these everyday investors are doing; it seems they might not be so "dumb" after all.

If everyday investors are not getting tips from experts, how are they doing so well? Also, their success raises a very good question: can we extract practical advice based on their approach? When we dissect their strategy, it's evident that a considerable portion of their success is attributed to a select set of stocks, colloquially termed as the "Magnificent Seven" in investment communities. This elite group encompasses tech behemoths: Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), Amazon (AMZN), Nvidia (NVDA), Meta Platforms (META), and Tesla (TSLA). Over the past ten years, these titans have consistently dominated the market.

These "Magnificent Seven" stocks are not just random names. Over the past ten years, these companies have made big waves in the tech world. They've come up with cool new things, led the market, and their growth has been off the charts. Because of this, people who watch the stock market closely have given them this cool nickname. But can we expect these companies to keep doing so well? Or, have people already noticed this and the price of these stocks reflects it?

So, here's something to think about: If some investors did really well because they put their money into these seven big-name stocks, should others do the same? And if these "Magnificent Seven" stocks have been the talk of the town, should we maybe just focus on the top three from this list?

We've got to ask ourselves: Did these investors just get lucky? Did they have some special knowledge or skill? Or did they maybe take bigger risks than most? This article makes us wonder about what really goes into making good investment choices.

Let's try to unpack this a bit more and see if we can make sense of it all, especially when thinking about the mix of luck, know-how, and the risks people take when investing.

Money and Investing: Not as Black and White as We Thought

We often approach money and investing like science, with clear-cut rules and predictable outcomes. However, the reality is that it behaves more like an art, influenced heavily by emotions and subtle nuances. Admitting that someone's success is down to luck can make us sound envious and acknowledging that our own success might be due to luck can feel somewhat disheartening. Regardless, it's crucial to recognize luck's role in the grand scheme of things for a well-rounded understanding of investing.

The Challenge of Distinguishing Luck from Skill

Hearing about someone making a big win in investing can be exciting, but these stories are often like lightning strikes - rare and hard to predict. It's tough to know if they got lucky, were skilled, or took big risks. If we only listen to these one-off stories, we might get the wrong idea about how investing usually works. For most of us, trying to copy these big wins might not fit our comfort level with risk or even be possible. It's like hearing about someone winning the lottery and thinking we all have the same chance. It's always important to understand the whole story before making decisions.

Investing, by its very nature, is fraught with uncertainty. Markets can be unpredictable, and what worked brilliantly one year might fail miserably the next. For the everyday investor, attempting to mimic these extreme successes can lead to financial peril. After all, not everyone has the stomach for high-risk investments nor the ability to stay calm and composed when the market takes a dive. This is where behaviour and psychology play a significant role in investing.

Enter Quant Investing

Is there a way that leverages long-term, repeatable patterns in the market rather than relying on extreme or one-off events? Quantitative investing stands out in the crowded field of investment strategies because it relies on analyzing historical data to identify patterns that have led to success in the past and are likely to do so again in the future.

This method focuses on trends and patterns consistently demonstrating resilience over time rather than one-off events or extreme scenarios.

An investment process that sifts through vast amounts of market data, demystifying the investment process gives the investor the ability to act rather than relying on luck or extreme events.

The confidence to act tips the odds in favour of the investor but also promotes a more rational, disciplined, and informed investing practice. It is a crucial tool for anyone looking to navigate the complexities of the market, minimize the role of luck and emotion, and maximize their chances of achieving sustainable financial success.

Learning from Failure and Embracing Risk

Investing is naturally risky, and encountering failure is part of the game. The trick is to build a solid financial foundation to withstand these setbacks, allowing us to stay in the game and wait for the tides to turn in our favour. Recognizing the role of risk in investing also will enable us to approach failures with a kinder, more understanding mindset, fostering an environment where learning and growth are valued, even when things don't go as planned.

Investing is a complex, unpredictable journey, intertwining luck, skill, and risk. Embracing quantitative investing equips us with the tools to navigate this journey more confidently, helping us focus on broader patterns and actionable insights. It teaches us to look beyond the surface, seeking wisdom in common trends rather than getting caught up in individual stories. It encourages us to view setbacks as opportunities to learn and grow, instilling resilience and understanding in our approach to investing. As we navigate the uncertain waters of investing, every step we take, forward or backward, becomes a valuable part of our financial journey, offering rich lessons for those open to learning.

So, what's the final answer? Are regular investors the new gurus? Only time will tell, but if you have money today, would you instead rely on repeatable patterns or luck, risk, and skill? Only you can answer which path works for you.

Let's stay savvy, investors!


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