Much of what we experience in life results from a combination of skill and luck. – Michael Mauboussin from The Success Equation*

Once you start viewing the world through the lens of success and luck it is hard to stop. Every glowing profile on the cover of a business magazine gets you think about how luck played a role in the success of the hot new startup CEO. (Remember they usually don’t put the founder of failed companies on the cover.) See the xkcd panel below.

Source: xkcd.com

All of this is a lead up to a fascinating story by James O’Shaughnessy author of the investment bible What Works on Wall Street: The Classic Guide to the Best-Performing Investment Strategies of All-Time.** In response to the release of Diana Henriques’ new history of the 1987 Crash, A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History, Jim tweeted out his life-changing story from the 1987 crash.

I don’t want to steal Jim’s thunder so you should read his entire post. Suffice it to say that luck played a significant role in Jim’s trading outcome. O’Shaughnessy writes:

For that trade sent me down the road that led to where I am today—I concluded that my emotions were my worst enemy in the market and that listening to predictions from gurus and other prominent market forecasters was worse than useless, it was destructive.

I suspect a lot of investors who have adopted evidence-based investing techniques have a story where their emotions got the best of when investing. In that light evidence-based investing seems like a welcome antidote. Luckily for Jim his 1987 experience lead him down a path that proved to be both intellectually and professionally satisfying.

*Additional reading on skill and luck from Michael Mauboussin: Understanding Skill, Alpha and the Paradox of Skill, The Success Equation: Untangling Skill and Luck in Business, Sports and Investing. See also this from A Wealth of Common Sense and 25iq.

**A number of years ago Jim was kind enough to write a blurb for my book Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere.


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