Role of Luck and Skill

There is still an element of luck or randomness in the markets. You can research a trade extensively and be absolutely convinced that it will work—but still end up losing money on it. No matter what you do, you won’t be right on 100% of your trades. What does this mean for traders?

As Michael Mauboussin writes in a white paper for Credit Suisse, “Where there is luck, focus on the process”. You can’t control the outcome, because it is subject to some randomness—but you can control the input, which is the process. You want to have a process that allows for the element of randomness but which is still robust and which you can adhere to.

If it’s helpful, think about the distinction between a well thought-out trade that happens to lose money versus one that makes money. The first is a losing trade, while the second position is a winner, because it makes money.  That is just talking about the outcome. But they are both good trades, in the sense that they were put on with careful consideration. Contrast that with a trade that is a winner—i.e. it made money– but was basically an impulsive decision and thus a bad trade. By focusing on the process over the outcome, we should be trying to make a series of good trades and avoiding bad trades like the plague. Over time, the results will take care of themselves.