Opinion – From Grain to Grain: Luck, superstition or skill; What has been responsible for your investments?

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Opinion – From Grain to Grain: Luck, superstition or skill;  What has been responsible for your investments?

It’s very inelegant to say that a person’s success was just due to luck. However, with a quantitative analysis of fund shares, it is possible to find evidence that some managers were just lucky. I don’t have access to your shares. However, have you ever stopped to assess whether your hits are due to luck or skill?

I remember I had a boss who didn’t wear a belt. He said that when he wore a belt, he lost money. (Fábio, if this text reaches you, know that you were one of my best bosses and I learned a lot from you).

This behavior is often observed in sports fans. They believe that if they adopt a certain attitude, their team will win.

Some might say this is luck or superstition, but in the financial market, I see many people call it an investment “strategy”.

Adrian Furnham’s book “50 Psychology Ideas You Need to Know” has a story that illustrates this point well.

Many investors sin by believing they have a strategic ability to win in the financial market. Even after their “strategy” stops working, they still believe that the strategy works and that at some point the results will come back.

Furnham tells the story of a student of animal behavior (ethologist) who once went on vacation and forgot the feeding mechanism turned on.

The researcher rewarded the pigeons with food when they recognized shapes or colors. When the pigeons got it right, they were rewarded.

Having gone on vacation, the researcher left the feeding mechanism on and released a tasty portion every 30 minutes.

To the pigeons, it looked like they had been rewarded for the behavior they just had. Some pecked at the cage, some jumped, some flapped, and some pirouetted.

Every half hour the pigeons were fed and believed that their “strategy” was responsible for the reward.

Don’t be fooled by “strategies” presented on social media. Many are nothing but superstition or luck.

For example, I once heard a man say, “Everyone drinks Coca-Cola, so buying your shares is a good deal.” This may have worked for a while and with this action, but it is not a replicable investment process for other assets and moments. A simple test can disprove the approach.

Be critical of what really made your investments successful. For example, if you built a stock portfolio and it appreciated a lot, ask yourself: what process did you structure to build the portfolio? How can this process be repeated?

Also, if the portfolio did not appreciate, analyze if it really was a “mistake”. Remember that every risky investment has a distribution of possible returns. The losing scenario could be one of the possible probabilities and it just happened. So it doesn’t mean I was wrong.

If you don’t have a clear process or strategy that can be robustly tested, think about it. You may be falling into the same behavior as the pigeons from Furnham.

Michael Viriato is an investment advisor and founding partner of Investor’s House

If you have questions or suggestions for topics that you would like to see commented on here, please feel free to send them by email.

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