‘Lucky’ investments come from sound analysis
Do you feel lucky?I am sometimes asked about that variable we call luck and its impact on portfolio success. A recent Ibbotson/Wall Street Journal study even attempted to quantify luck as an investment variable.Here’s my take: luck is more valuable than we think but not in the ways that we imagine. It’s true that being in the right place at the right time has its advantages but in my experience there is one crucial distinction – that “right place at the right time” is often more about patience and blunder avoidance than about being a daring investor timing the next hot trend. More often than not, people make their own luck.The Roman philosopher Seneca said it best about two millennia ago: “Luck is what happens when preparation meets opportunity.”When it comes to financial counsel, I’ve often suggested that you make luck by avoiding major mistakes, genuinely understand your risk tolerance, and take only as much risk as is necessary to reach your financial goals.An independent and contrarian mentality also enhances the luck factor. The seeds of my investment career go back to the 1970s. If you listen to the conventional take on that decade, it comes across as a black hole of investing. But if you dig deeper, you discover a different story.Even with two major oil price shocks that turned the economy upside down, the change from the gold standard, inflation, stagflation, rising interest rates, political turmoil and the rapid decline of the country’s industrial strength – smart and patient investors could still generate profits.Cause and effectEven savvy investors such as Jon Lovelace and Sir John Templeton didn’t give into the leverage mania earlier in the 20th century.Famous investors Warren Buffett and Jeremy Grantham are today’s versions of Templeton and Lovelace.Advisors and investors alike would be wise to remember that nothing happens without cause and the lessons one learns early in dealing with market volatility are crucial.Almost three decades ago, a wonderful mentor named Al Levy stewarded a group of us to a solid foundation. I learned how to be constructively paranoid and always critical. I was taught to never make an investment decision unless I understood it, and most importantly, how it would benefit my client. Al made me very lucky – and I was lucky to receive his mentoring.An understanding of history and geopolitics can also enhance one’s luck. The United States has been a large and successful economy, but that doesn’t mean developing nations don’t want what we have. Understanding how to make luck, knowing what it is and what it isn’t, should be important for an investor. We don’t apologize for avoiding the casino of the investing market – derivatives, the dot-com bubble and opaque funds that could not be understood. If you know anything about luck and gambling, you know that the casino holds a significant advantage. In reflection on the luck of “bubble avoidance” over the past few decades, I believe in sticking with the basics such as saving as much as possible, early and often, and truly understanding your own risk tolerance. You’ll be amazed at how lucky you can become.Tom Sedoric, managing director-investments of the Sedoric Group of Wells Fargo Advisors in Portsmouth, can be reached at 800-422-1030 or firstname.lastname@example.org.