Published On: Fri, Sep 9th, 2016

Investing: A Game Of Skill Or Chance?


Amy The Nurse

When you see a successful investor, what’s the first thing that enters your head? Do you think they’re lucky, or do you admire their sheer skill? The truth is, it’s most definitely a combination of both. Let’s say you have two hedge fund managers, working with similar clients and using the same software. They both recommend similar business stocks to their clients, who both invest the same amount of money. One loses everything; the other makes a killing. But why?

Laying the groundwork

First of all, great investors take a long time to make their fortunes – and put in a lot of work. They will put their successes down to this education – as will your professional traders and hedge fund managers. And they are correct, to an extent. It takes years to understand the volatilities and nuances of the market. And every market is itself an enormous topic that covers more detail than your average PhD.

Investing in tools

Investors also need to use their money to invest in tools. And, they need how to use these tools to increase their chances of success. Again, this is not luck – it’s a learned skill. If you are a first-time investor, it’s vital to get the right tools to assist you. It could be forex trading platforms, stock market data, or knowledge of world events. Even the newspaper offers valuable advice for your investments. The trick is to learn how to use them. That said, there is still a big problem when you talk about skill in investment. Let’s take a look at that now.

It’s not easy to define success in finance

Think about financial winners, and it is hard to explain what makes them a success. Is it because they went all in with a new tech company? Or because they are an investor that beats the Dow Jones, without fail, every single year? The former might have made a large fortune, while the latter could only be a little up after five years. But both are winners, right? And it’s here that luck starts to appear when it comes to investing.

The individual who put all their money into a tech company was foolish. No matter how much you know, you just cannot guarantee success at that kind of level. You can dream about it, sure. But going all in like that will tend to end in disaster. And making a fortune out of it is pure, unadulterated luck.

It’s easier to be lucky

And that is the key issue that makes so many people fall into investment traps. The gains from being lucky are far greater than those from being sensible. The trouble is, how often are you going to get lucky? Once? Well done – you’ve made a fortune. But what if you are feeling lucky again and put half that fortune into a similar investment – and lose. And how many times in a row do you think you will be lucky? Four? Five? If you get anywhere near that, you should just pack it in and start buying lotto tickets.

As you can see, success in investment has a lot to do with skill and knowledge. But as you can see with our hedge fund managers in the opening paragraph; sometimes you just run out of luck.