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06 September 2017

Lady Luck


Luck and Battles

For a long time, I held the view that luck is an under-valued element in considering success in financial markets. It’s not completely clear what Napoleon actually said - it may have been “I would rather have a general who is lucky than one who is good”, or possibly “I know he’s a good general, but is he lucky?” -  but either way, we know what he meant. He himself wasn’t, in the end. Or at least, he came up against one who was luckier than him in Wellington. The latter had two particular pieces of luck at Waterloo. First, the extraordinary feat of the Foot Guards in holding Hougoumont Farm (and bear in mind that Wellington was allegedly the commander who had described the common soldiers under his command as “the scum of the earth”) and secondly the nick of time arrival of Blücher and his Prussians to swing the battle decisively. 

Or how lucky was Zhukov at Stalingrad? I wouldn’t for a moment take anything away from the way the Russians had to fight to take back their city, but when the opposition strategy was set by Hitler - by then with virtually no connection left to reality - and tactics by Paulus - desperately promoted beyond his level of competence - who could deny Lady Luck was smiling on Zhukov?

Luck and Probability

It’s a big jump from Waterloo and Stalingrad to LME trading, but doesn’t the need for luck still hold true? After all, the market can be chaotic, unpredictable and contrary. So would it not be the case that to succeed, the best ally a trader could have would be luck? That’s always been my contention; success is bred from the chaos of the market, and the one who best capitalises on it is likely to be the one who rides with the luck of the movement. And, importantly, the more often you are successful, the more difficult sustaining that success becomes; or so it would seem. As an example of that, some years ago, a friend of mine who was working for a hedge fund tried to encourage me to invest some of my own money in his fund. “Look,” he said, “how long a run of success we have had, how many positive quarterly returns we have put in.” For me, that was the biggest reason not to do it; the longer the run of success, the greater the likelihood of the run ending. Now, that is of course an illogical position. Think of tossing a coin; the result of each throw will be heads or tails, and regardless of what has gone before, each time, the chance of either result is 0.5. Luck and probability don’t really sit that comfortably together.

Preparation and Opportunity

Then last weekend, I read an interview with an up-and-coming England rugby player. The interviewer suggested to him that he had been lucky in his career to date, with being in the right place at the right time. The player countered with a quote from Seneca - “Luck is what happens when preparation meets opportunity”. So to go back to my military scenes; perhaps Wellington had recognised that of all his troops the bloody-minded Foot Guards were the ones who could be relied on to hold the strongpoint. He certainly knew Blücher was coming, so perhaps we should credit him with understanding the timing of the engagement. And certainly by the time he launched Operation Uranus, Zhukov had had ample opportunity to understand the inherent weakness of the German position and the lack of leadership. 

Make your own Luck?

I’ve come to the view, from this, that my original position was wrong - or at least, not sufficiently developed. Yes, luck is important, but Seneca is probably right in pointing out that preparation will mean that one is in a position to take advantage of opportunities that present themselves, thus effectively going a fair way toward making one’s own luck. So for all the times I have pointed out to dealers that they should thank some deity for their good luck, I was wrong. There’s a lot more to it than that, and they deserve more credit, in most cases. 

Oh, and the hedge fund? Well, it wasn’t too many quarters later that it all collapsed (without my money). I was right, even if for the wrong reasons. 

Back to luck, again, I suppose.     


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