The one-day cricket match between England and New Zealand in 2019 will be one of the best one-day matches in cricket history. Did England deserve to win based on their talent? Yes, they deserved it. But were they lucky that day? Very lucky.
In football, England lost the 2021 European Cup final to Italy 3-2 on penalties. This is the other side of luck.
Success is an interplay between skill and luck. The famous book "Stay Hungry, Stay Foolish" by Indian author Rashmi Bansal covers the inspiring and successful stories of Indian entrepreneurs. These stories are important to read because they give hope to investing in the wealth building business. But risk can have two consequences. success and failure.
The problem is that no one writes a book called "Stayed Hungry Died Hungry" A story about failed entrepreneurs.
The stories were written by kings who triumphed. They are clearly heroes in their history. The dead cannot tell their stories. The king who died also had a strategy.
Netflix produces hundreds of series every year. Do you think Netflix knows in advance which series will be a success or a failure? The first season of Sacred Games was a huge success, while the reaction to the second season was lackluster. Nassim Nicholas Taleb, famous author of "Fooled By Randomness", explains that "mild success can be explainable by skills and labour. Wild success is attributable to variance. (Luck or randomness).”
Hosted by a relatively new star and filmed in Slums of Mumbai, 'Slumdog Millionaire' won eight Oscars, including Best Picture in 2009. How do you explain that?
The equation of luck and skill is fascinating.
For games like chess and casino, it's easy to separate luck from skill. Chess is a skill and the casino is luck. But life, investment and many other things, luck and skill are mixed. It is difficult to say that in the result, part x was skill and part y was luck. But the equation in our mind is simple. When things are going well, it is natural to attribute it to skill, but when things are not going well, it is bad luck. Personal success is a skill and the success of others is luck.
A growing number of studies show that most stocks (~ 96 percent) do not outperform treasury bills in the long term. skewed equity returns. Most returns in the stock market are generated by very few stocks (~ 4 percent). Very few videos go viral, very few songs get hits, very few people to become stars, and very few to be selected on the Indian cricket team (out of a total population of over 136 million rupees).
When it comes to investing, everyone wants to get rich by investing in stocks that go multi-brand. Everyone is looking for Apple, Google, Amazon, HDFC Bank or Bajaj Finance NSE with -0.01%. The beauty of multibaggers is that they all reverse common sense in hindsight. To learn more about the companies, see past interviews of their founders. You can see how weak these companies and ideas were at the time. Even when private equity firms invest in unlisted companies, they diversify their funds. It is impossible to predict which idea will be the next Paytm, Flipkart or Byju’s.
A thought experiment
Imagine that a decade ago you were told that the entire nation would stick to its data-intensive mobile phones. All activities, from grocery shopping to social interactions, banking, education, games, office work, and everything in between, will be done over the phone. You have accumulated all communication actions. The story is over, but most telecommunications companies are out of business or suffering losses. Investing is not as simple as it sounds.
With clean energy, traditional oil and gas companies are at risk. With electric cars, traditional car companies are at risk. With the entry of technology companies, banks that have built physical branches are at risk. With online shopping, traditional retail is at risk.
Is it difficult to decide which companies will survive and adapt in the future? If you've invested most of your money in your business or your company's ESOP, you're not diversified. Remember Enron, AIG, or Lehman Brothers.
Stock mutual funds and index funds give you the diversification you need. But if you have 5 mutual funds and they all invest in the same country, you are not diversified. FIIs can enter or exit any country with the click of a button. Each country has country specific risks. Read history. There may be black swan events. Diversify with international equity funds.
If you have all your investments in one asset class, you are not diversified. Each asset class has cycles, and sometimes these cycles can be very long. History shows that stocks, gold, and even bonds go through long periods of low or negative returns.
Diversification between countries and asset classes. Build a portfolio with a good mix of local stocks, bonds, gold, international stocks, and REITs to manage risk.
Personal finance is about managing risk. The boats are not designed and built for normal weather conditions, but to withstand extreme weather conditions. Discuss risks openly and understand how your financial advisor handles risks.
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