The trouble with dumb luck


I stumbled across a really good quote from Dr. Daniel Crosby’s investing book The Laws of Wealth that I may have printed and laminated into a wall-sized poster:

Consider the story related by Paul DePodesta, a Major League Baseball executive made famous in the book Moneyball.

Here it goes:

 

Many years ago I was playing blackjack in Las Vegas on a Saturday night in a packed casino. I was sitting at third base, and the player who was at first base was playing horribly. He was definitely taking advantage of the free drinks, and it seemed as though every twenty minutes he was dipping into his pocket for more cash.

On one particular hand the player was dealt 17 with his first two cards. The dealer was set to deal the next set of cards and passed right over the player until he stopped her, saying: “Dealer, I want a hit!” She paused, almost feeling sorry for him, and said, “Sir, are you sure?” He said yes, and the dealer dealt the card. Sure enough, it was a four.

The place went crazy, high fives all around, everybody hootin’ and hollerin’, and you know what the dealer said? The dealer looked at the player, and with total sincerity, said: “Nice hit.”

I thought, “Nice hit? Maybe it was a nice hit for the casino, but it was a terrible hit for the player! The decision isn’t justified just because it worked.”

My shorthand for the concept illustrated by DePodestra’s story is, “you can be right and still be a moron.”

Perhaps you know a friend who gambled big on a single stock and made a great return. Results notwithstanding, your friend is a moron. Maybe you jumped out of the market right before a precipitous drop because of nothing more than a gut feeling. Lucky you, but you’re still a moron.

Exceptional investing over a lifetime cannot be predicated on luck. It must be grounded in a systematic approach that is applied in good times and in bad and is never abandoned just because what is popular in the moment may not conform to longer-term best practices.

 

Faulty Logic

You could also sum this up with “don’t confuse brains with a bull market.”

We’ve all been there. You made a terrible trade based on faulty logic (or no logic at all).

You misassigned probabilities or ignored the risk you were taking. You shot from the hip. And maybe it worked out.

 

investing

 

Randomness

Just don’t learn the wrong lesson from it.

A good outcome doesn’t mean it was a good decision. And plenty of good decisions have really lousy outcomes.

Randomness is a big part of it.

This is the nature of a world in which we have to make decisions with imperfect information.

 

Photo Credit: Robin Corps via Flickr Creative Commons

 

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Charles Sizemore
Charles Sizemore
Sizemore Capital Management LLC is a registered investment advisory firm located in Dallas, Texas. Charles Lewis Sizemore, CFA is the founder and Chief Investment Officer of the firm.