Better Lucky Than Smart

To kick off today’s post, let me tell you a little story.

The story is about a good friend of mine from the MBA days. To preserve confidentiality, we can call him Mike.

Today, however, I will call him the Frustrated Consultant.

With that in mind, I present to you:

The Story Of The Frustrated Consultant

There are many parallels between Mike’s journey and my own.

It starts in the late noughties, when he also took out a $200k loan and moved halfway across the country to pursue an MBA.

We met at one of the recruiting functions at the very beginning of the program. Like me, Mike wanted to move abroad post MBA and experience living in Europe (because who knew this was going to happen?)

Unlike me, he was smart enough to avoid investment banking. Instead, he landed a coveted role with one of the Big 3 consultants, no easy feat.

We landed in London within months of each other – and went to work chipping away at our respective student loans.

Mike did well. Not too long ago, he made partner at his firm. We don’t talk numbers, but my sense is that he clears somewhere around £400k a year. Chump change it isn’t.

Mike is also quite good with his money. He isn’t flashy, has a good savings rate, and has been investing in the stock market.

In other words, I am sure his net worth is somewhere in the low seven figures.

So why is he frustrated?

Well, the thing is, Mike is from San Francisco.  And if there’s one thing you’ve got to know about San Francisco is that housing prices have been on a tear for the past decade.

So Mike once ran the maths on what an alternative journey would look like.

To be specific, he figured out that had he used his $200k to buy a $1m house instead of funding an MBA, that $1m house would be worth around $2.5m today.

Correspondingly, Mike’s equity in his home alone would be around $1.9m (including some mortgage paydown).

His actual net worth?

Likely much higher, considering savings, investments, and all the money he could have made working in the tech sector out west.

Guess what?  I’d be frustrated, too.

Years of risk and sacrifice, including going through the professional equivalent of hard labour. Despite what people may say, consultants bust their chops just as hard as bankers or lawyers.

All the maneuvering and stress related to making partner in an ultra-competitive environment.

More time on planes than can possibly be good for a human being.

All to end up well behind the “status quo”.

Risk And… Reward?

When Mike shared his frustration over a pre-lockdown dinner (remember those?), his wife stepped in with a very pragmatic observation.

That is, the fact that Mike was making a decision based on the best available information to him at the time.

Sure, you could build a case for San Francisco housing back in 2010. It’s even easier to do so today, with the benefit of hindsight.

Some people saw the light back then – and went all in. But many (if not most) didn’t.

They happened to have bought a house in SF because they needed a place to live in – and ended up beneficiaries of one massive property bull market.

Now, I don’t disagree with Mike’s wife here, though given that they met here in London, she was probably slightly miffed with the whole idea of this alternative journey.

But to me, there’s a broader argument here as well.

Wealth vs. Wealth

When I look at Mike’s net worth today, I see it as a function of many factors.

Sure, there’s the stock market, which forms the bulk of his portfolio.

But peel back the onion and there’s much more there.

The education credentials. The network. The industry knowledge and experience.

A fantastic (and rapidly growing) Rolodex of C-suite decision-makers.

The quality of life that comes from pursuing one’s dreams of taking chances and following a path less travelled.

The fact that as far as I know, Mike hated his pre-MBA job.

Some of these things are already in the net worth number, a monetary crystallization of all the efforts Mike’s put in over the years.

Many others are bound to be reflected in that number going forward.

And some, like the quality of life, will never be reflected – but that doesn’t make them any less important.

To me, the above components would mean far, far more than owning a great house with tons of equity in it.

A Dose Of Pragmatism

If all of the above sounds a bit too wishy-washy and impractical, we can add a quantitative component here.

First of all, there’s diversification.

Mike’s portfolio of “assets” is so broad that even if you were to take all his money away today, he’d be back up in millionaire territory in just a few years.

Can’t say that about someone sitting on an expensive piece of land (though I certainly hope no one has their house taken away!)

Then there’s future growth.

I am pretty confident that going forward, Mike’s combination of skill and network is likely to compound much faster than SF property.

And, of course, Mike also has the optionality of going back home, landing a plum strategy role in Big Tech, and getting in on a piece of that West Coast action.

But most importantly, Mike’s story presents a crucial lesson for all of the investors out there.

It is the lesson of:

The Role Of Luck In Investing

There are hundreds of millions of investors in the world.

Perhaps even billions, if you consider all homeowners to be investors (Mike clearly does).

By virtue of pure math, some of them are bound to get lucky.

And those are the ones you hear about. The GME and Bitcoin success stories are all over the news.

Losers? Not so much.

It’s much more fun to hear, talk, (and imagine what it would feel like) about the 0.1% who make millions, not the masses who lose their houses.

When is the last time you read a story about homeowners in Detroit?

The unique thing about investing is that you can do everything right, and still come out behind.

If you work out twice as much as your friends, you are likely to end up with a better body.

Studying twice as hard as your classmates is a near-guarantee of blowing them out of the water when it comes to exams.

They even say that in blogging, the longer your blog has been around, the more successful it will be (note – I wouldn’t know).

In investing, that simply doesn’t matter.

You can have a perfectly constructed portfolio.

In the meantime, your golf buddy literally sleepwalks into an investment opportunity and makes more money in a year than you will in your entire life.

So what can you do about it?

Venn Diagrams

The good news of the day is that planning and luck are not mutually exclusive.

And yes, you can have the best of both worlds, without rolling the dice on your financial future.

First of all, success correlates to exposure.

Whether it’s building up an equity portfolio, accumulating real estate, going all-in on your career, or focusing on side hustles – something is bound to work.  You just need to take enough shots at the goal.

It might even be that everything works.

Second of all, luck isn’t exponential – but compounding is.

Taking one wild punt after another doesn’t improve your chances of success. It only guarantees that at some point, you will run out of money.

A proven investing strategy, on the other hand, is guaranteed to gain momentum over time. Kind of like this:

You simply need to stay the course long enough for your efforts to pay off.

Finally, you always have the option of allocating a portion of your portfolio to speculative bets.

Someone with a $500k net worth can easily put aside $50k as “play money”, without risking their future along the way.

If the bet pays off – great. If not, you are still on track financially.  Have your cake and eat it too.

Yes, luck plays a crucial role in investing.

That being said, you are much better off making your own luck instead of relying on it.

Most importantly, don’t get frustrated if you feel that luck has somehow passed you by.

If there’s one thing that’s certain, it’s that your day in the sun is on its way.

Happy investing!