Appreciating or Underestimating?
The role of chance and choice
Hard work matters a lot. What I’m going to write about has nothing to do with devaluing what it means to be gritty and work tirelessly towards something meaningful.
But what I’m going to write about has everything to do with at least acknowledging the role of chance in this world.
This isn’t to say everything in this world happens due to randomness. We all have our unique perspectives as to the reason for why things happen.
I’ve probably read all of Morgan Housel’s blog posts several times, but there is one about financial advice for his newborn daughter that stands out above the rest.
In particular, it’s this:
It is easy to assume that wealth and poverty are caused by the choices we make, but it’s even easier to underestimate the role of chance in life.
Everyone’s life is a reflection of the experiences they’ve had and the people they’ve met, a lot of which are out of your control and driven by chance. Being born to different families, with different values, in different countries, in different generations, and the luck of who you happen to meet along the way plays a bigger role in outcomes than most people want to admit.
I want you to believe in the values and rewards of hard work. But realize that not all success is due to hard work, and not all poverty is due to laziness. Keep this in mind when judging people, including yourself.
I’ll never forget the first time a baseball coach introduced the mental game aspect of baseball to me. In a game where failure is to be expected, mental strength is a must.
The word he would use is “internal locus of control”. In other words, only worry about what you can control.
In life we all want the success of our careers, relationships, investments, and anything else meaningful to come as a result of something squarely in our control. And to an extent, we are in control. But in many ways, we are not.
Here are a few examples:
The timing of your investment returns
Building up a health savings rate and having the intestinal fortitude to weather stock market downturns is no easy task.
But it’s pure chance whether the crucial years leading up to your retirement end up being boom or bust years. For example, Ben Carlson looked at 30-year windows of time where you start out saving $5,500 per year, increasing that amount annually by 3% to account for inflation.
It turns out they can matter a great deal as the range in ending balances was huge and highly dependent on the time period selected to start saving money. For example, the best scenario turned out to be someone who started out investing in 1970 and finished saving in 1999. This was the perfect 30 year period because the 1970s were a difficult, volatile decade for financial market returns, so you would have been buying up shares at lower prices, most notably during the 1973-74 bear market, at the outset. And the period ended at the peak in one of the greatest bull markets of all-time. The ending balance in this scenario was nearly $2.9 million.
On the other hand, the worst period started in 1945 and ended in 1974 at the bottom of that nasty bear market in the mid-1970s. The ending balance was just $774,000 or nearly $2.1 million lower than the 1999 end date.
This is also a reminder that your investing journey doesn’t have a start or an end date. People don’t stop investing the day they retire. Typically you’ve still got decades of life ahead. The “worst case scenario” above (which really isn’t that bad because those are 8.6% annual returns) can be made a whole heck of a lot better with a bit of patience to ride things out.
The job market you graduate into
Similar to above, you have no say in whether you graduate into a booming economy or a nasty economic contraction.
Many of the financial writers I follow graduated college into the teeth of the Great Recession. A common theme I noticed is that it created some stress upon graduation, but I think this initial stress may have created more resiliency and success in the long run.
Or fast forward more than a decade later from 2008 and you get headlines like these.
Some headlines are a bit short-sighted or hyperbolic, but it’s pretty crazy to think these are only a few years apart.
But just like patience being a virtue in riding out stock market volatility, a determined work ethic will always pay off no matter what the job market presents.
The relationships you’re born into or build onto.
I’ll be the first to say that good energy attracts more good energy. But there is always an element of luck and chance from the start.
Whether you’re born into a family with financial resources to support you fully. Whether you’re born into a developed nation or a war-torn developing country. Whether your parents, teachers, and coaches instill foundational values.
It’s clear the family you’re born into has plenty of chance involved, but so do the conscious decisions you make such as choosing a partner. There is no formula. We’re all just kind of figuring it out just like it’s outlined here.
The most important decisions in your life may be whether to marry, who to marry, and whether to have kids. But none of those topics are taught in school. They’re hardly even discussed. How could they be? They aren’t problems you can distill down to an equation, or even a broad principle.
People have different personalities, goals, experiences, and levels of chance and serendipity, all of which make universal truths hard to find and difficult to teach. No matter how smart the world becomes, the best answer will always be, “You’ve got to figure it out for yourself.”
A lot of things work like that. Some of the most important topics are the hardest to teach, and real world experience is the only school.
I’ll leave you with this from Ed Thorp.