M5: Skill vs Luck
Two friends, A & B, with equal capability, starts the investment journey together with exact same amount. End of every week/month/year they crosscheck their accumulated gain/loss till date, that decides the winner & looser (???). In the journey of making money, what do you think, will they move together or most of the time one will dominate other? Note that, they have equal capability.
Try it out yourself, Toss the coin and if Head, A gets a point else B. Accumulated point decides the winner after every toss.
| Trial | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | … | … | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Toss | H | T | T | H | T | H | H | H | T | T | H | H | T | H | T | T | |||
| Points A | 1 | 0 | 0 | 1 | 0 | 1 | 1 | 1 | 0 | 0 | 1 | 1 | 0 | 1 | 0 | 0 | |||
| Cum. Points-A | 1 | 1 | 1 | 2 | 2 | 3 | 4 | 5 | 5 | 5 | 6 | 7 | 7 | 8 | 8 | 8 | |||
| Points B | 0 | 1 | 1 | 0 | 1 | 0 | 0 | 0 | 1 | 1 | 0 | 0 | 1 | 0 | 1 | 1 | |||
| Cum. Points-B | 0 | 1 | 2 | 2 | 3 | 3 | 3 | 3 | 4 | 5 | 5 | 5 | 6 | 6 | 7 | 8 | |||
| Winner | A | – | B | – | B | – | A | A | A | – | A | A | A | A | A | – |
Try the whole process yourself with a much bigger sample and see how things move over a period of time. In this sample: Out of 16 Trials, A wins 9 times compared to B’s 2 wins (5 times they are equal).
Though both have equal probability to win each toss, over a period played sequentially, One getting the upper hand over the other is quite high. Doesn’t this kick in our emotions??? Doesn’t Jealousy, Ego, Frustrations starts playing in mind?
Have we not faced the same by comparing our portfolio with others? Why others, with Index funds? Are they comparable???
Do you think Capability alone decides Winners? Is it Skill v/s Luck OR Skill & Luck that is deciding our faith in investment Journey?
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