A Perspective on Luck

Author: Vale

I am a great believer in Luck. The harder I work, the more of it I seem to have.

-Coleman Cox

Luck smallEvery so often, someone famous makes a speech where he or she attributes life success mostly to luck. Malcolm Gladwell wrote an entire book with the same premise. Is life really about luck or choices?

And what is the message that these luck advocators are trying to send to our youth? Do we want to start instilling into their minds that they should not strive for success because no matter what action they take, the outcome is predetermined? Do people really believe this?
Generally this assertion about success is rooted in liberal ideology and is espoused by a diametrical dichotomy: those who never found success in life, or those who are wealthy because everything was handed to them (inherited the family business, or had powerful family connections, etc..). Those in the first camp may have tried and failed (or never bothered to try) and those in the second camp were born lucky and they extrapolate their situation to everyone else's. Due to their respective situations, neither group can comprehend how other people become successful or wealthy without luck playing a major role. Usually this mindset is also the justification used for the liberal policies of forcing the successful to share their good 'fortune' with those less 'fortunate' and this 'sharing' being advocated through the tax code. If all success were determined purely by luck, then a progressive tax rate would be justifiable. However, anyone who has worked hard in their life to succeed either through education, risk taking and gratification delaying, would be offended by such allegations, because life for most people is about choice. One can take risks and make choices to improve their chances of success or one can sit on one's hands and hope. Success is not guaranteed and not everyone gets a trophy, as many work hard but fail. But are those who succeeded luckier than those who failed, or did the choices they make improve or determine the outcome?
Sure, in life some luck is involved. One is born in a country that may have better opportunities than others. One may be born to wealthy parents who will spend as much money as necessary to send them to Harvard. Maybe they inherit the family business or fortune. These are situations one does not have influence over when they are born. But after that, luck is more about choices that lead to exposures to different outcomes. Even for people born with similar starting places, there is a great distribution of outcomes. One can improve one's luck by making smart decisions or choosing different paths. Sometimes an opportunity comes up. Do you act on it, or abstain? How would luck be explained by serial entrepreneurs? Are they just luckier than others?

  • Combination of Luck and Skill

Some cases may be a combination of luck and skill. Warren Buffett is currently worth about $44 billion dollars, making him the third richest person in the world. Everyone always gushes about how he is the most successful investor in the world, and he may very well be. Over his investment career of 48 years, he reportedly racked up 20% annual returns. That is a fantastic track record by any account. But without his cushy start, you might have never known about him and he may not even have become a billionaire. Let me explain where I am going. If you take his net worth and remove the compounded return back to when he was twenty, which is an additional 20 years, and assuming that he has always netted a 20% annual return even from the beginning, the starting amount would be around $672,000, in 1953 dollars. After adjusting for inflation, that sum would be about $5.8 million dollars. How many 20 years olds do you know that can start investing with $5.8 million dollars? And that would be with him never taking a single dime out of his investments! The missing link not talked about very much is that he had a leg up with his father who was a wealthy congressmen who owned an investment business. Starting money, connections and a ready client base were a very valuable starting place. It's like being born on third base. But had he started under a middle class scenario, he could still have had such a track record but you may have never known about him. If he truly started with $10,000, which would be worth $88,461 on an inflation adjusted basis, he would have around $500 million today. Still an impressive track record, but such a paltry sum wouldn't even make the Forbes list. Even if you assume that he magically obtained an additional $10,000 (remember, in the beginning of his career this would be worth about $88k) from elsewhere and contributed that additional amount into his portfolio every year, he'd still only be worth around $4 billion. So, becoming a billionaire may be more luck than skill, but there are many more multi-millionaires who actively made smart decisions to find their success and gain their wealth. You can't use the small minority of lucky billionaires as the proof for all examples showcasing success as luck.

  • Personal Anecdote

Let me tell you about luck. I wasn't born to a wealthy family and I started out taking classes at a community college before moving onto a public university in the city I was living in. This is what I found: the harder I studied for college classes, the luckier I became with exams. The more time I spent on coursework instead of socializing, the luckier I became with getting A's in the classes I was taking. My spring breaks revolved around the library. Then, the harder the classes I chose to take, the luckier I became in earning a marketable degree. With a degree in mathematics in hand, I tried to get a job in the field I was seeking, but I wasn't lucky there. So with further study, I got lucky in getting a high score on both the GMAT and GRE, which are standardized tests for business and graduate school, respectively. After applying to some top graduate programs, I didn't get lucky getting accepted. Instead, I persevered and earned another marketable graduate degree at the same university, which made me luckier in getting my first post college professional position. But it wasn't good enough for me. With my first graduate degree and year of professional work experience on my resume, I re-applied to some of the schools I was originally rejected from and I got lucky in getting accepted to several of them. After taking some big risks by quitting my good, stable job, and taking out almost $100k in student loans and moving across the country, I endured the most challenging course work I had ever encountered. Once again I found that I got lucky getting good grades the more that I studied. Once I graduated, I was starting with a substantially negative net worth and several years loss of valuable professional work experience. However, with my most marketable degree completed, I found that the luckier I got in getting job interviews for the field I had originally sought. When I studied for job interviews, the luckier I got in receiving offers, even though it was right in the middle of the financial crisis. My salary increased 50%, but because the job market was still in the tank, I didn't get lucky in obtaining the exact role that I wanted, but I had a plan: I remained mobile for opportunities that might come up. A year and a half later, I decided to improve my luck and apply to some other roles that were closer to my targeted role. Some lucky interviews led to lucky offers. I guess I was lucky when I chose to negotiate a higher offer than was originally offered. The new compensation now 100% higher than my first post graduate position. I moved again to another city about 500 miles away I had never even been to (aside from the 4 hour in person interview) to start my new role. My home and family now across the country, but I succeeded in reaching my goal. My path was not easy by any means, but I was willing to make sacrifices to complete the goals that I was targeting. Twelve years ago I set out on a journey to complete a career goal that required a lot of hard work. I made it there, but I am not done, as I have higher goals set that I am working towards. Luck would have brought me to the finish line without any effort. Instead, I made my own luck.

  • Final Words

There are different definitions of success and everyone can define it however it will make them happy. Because that is what counts: You are dealt your cards in the beginning and you can only make the best of the starting outcome. Will you be happy with your life at the end? People like you and I may never make it to the $500 million dollar club, but we will have accomplished a lot more, given our starting circumstances, than many of those people ever did, and that is something to be proud of. And while accumulating a few million isn't an unreachable goal for anyone if they make good life choices and that is something that they want, one must remember that money isn't everything. You should find happiness in other ways too, through personal relationships, learning, travel, and personal satisfaction. But always remember: Luck is when something falls in your lap; Luck is something that finds you. Success is something you find!




-2 # known 2013-03-06 02:37
Buffett's secretary Bosanek pays a tax rate of 35.8 percent of income, while Buffett pays a rate at 17.4 percent.
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+2 # Vale 2013-04-06 14:47
See comment discusion:
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# trader 2013-02-06 16:23
If my memory serves me correctly and if what I have read about him, Buffet didn't start with a lot of money. The reason why I don't agree with the reverse engineering of his current net worth and returns is that he had several limited partnerships where he got a cut of the profits. So if he made 20% a year and he was going off the 2 and 20 hedge fund structure he was making 4% from returns of his assets under management and 2% for his management fee. Even with that information it's still impossible to reverse engineer his starting capital because you don't know how much he managed every year.
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+2 # Illinois Metis 2013-02-07 14:43
@trader ... you didn't read the article carefully enough. The readily available public information *already* has established his father was politically connected wealthy and owned a financial firm with a top flight client list.

He was just trying to show through rough mathematical estimation just *how* "lucky" he'd have to have been (in monetary terms) to get where he is today. Both Warren Buffet and Unknown Businessperson may have been equally skilled in their investments and business acumen but only Warren gets to have 50 billion dollars.

He shows that both luck and skill determine outcomes - and not always in equal measure. What's more interesting to explore (at least to me) is how *bad* luck (being born at the wrong time, getting injured, etc.) can influence outcomes. Nassim Nicholas Taleb explores this nicely and in some ways exemplifies "success" in the context of risk and potential failure (born in Lebanon, English as third or fourth language, etc.).

Thanks for the article.
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+2 # Vale 2013-02-07 17:12
Illinois is right.
Mainly my argument is that he could have still been the successful manager that he has always been, but if were born to a different starting place it would would have completely changed the outcome. What if his father had been a plumber? Would Buffett have had such an early exposure to stocks and investing? Would he have started his first job working at an investment partnership had his father not owned it? Could he have still hobnobbed with the wealthy investors had his father not owned the business and not been a powerful congressman with lots of wealthy friends and acquaintances? What would have happened if he would have started his partnerships in a bear market? The S&P500 nearly doubled leading up to his initial partner formation and continued to surge on for years. Perhaps he would not have been able to find investors, or his performance may not have been as great, to get those partnerships started.

And don't get me wrong. I don't dislike Buffett or anyone else because they came from such beginnings. I was just trying to exemplify that luck can make a play especially in extreme situations (such as becoming a billionaire, or getting discovered as an actor), but I believe that anyone has a chance to succeed if they make good choices. They may not become billionaires but they may still do very well for themselves. I'd still be impressed with Buffett's acumen if he were only worth $50 million and had started from humbler beginnings. It's all relative.

And to Trader's point, I think that it is somewhat funny that Buffett speaks out against the 2% and 20% structure [1] even though he charged a similar structure in the beginning himself [2].

[1] page 20, last paragraph:

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