Creating Your Own Luck

Today’s post is going to be a little different than the usual fare. It’s not really insurance related. It’s perhaps more personal development advice than anything else, but stick with me, it will make sense.

So one of the tough things about being an investor, or any other profession with a lot of uncertainty of outcomes (say a cat underwriter) is it’s difficult to evaluate skill vs. luck in results.

The common refrain of the efficient market crowd is any investor who outperforms did so due to luck because, after all, randomness suggests someone would land on the far extreme of the distribution tail.

Of course, these same people never thought that being a successful academic or journalist or consultant was due to luck. No, they had skill! Only the investors they commented on didn’t. (Where’s the eye roll emoji?)

One thing the critics overlook is that people have agency to influence their luck. What do I mean by that?

Fooled By Non-Randomness

Let’s take a simple example. You and two of your friends go to a baseball game. You, because you’re a dork and don’t mind people mocking you, bring a glove. Your friends don’t.

One of your friends is now embarrassed to be seen with you and trades seats with someone in the next section.

A foul ball comes to his section in the fourth inning and it’s headed his way. Guess what happens? He drops it. Because he didn’t have a glove. No souvenir for him.

In the next inning, another foul ball is hit and this time it’s heading straight for your section!

But it’s coming for your other friend two seats away. He also drops the ball (no glove) and it rolls away.

The game ends with no more foul balls, so you all go home with no souvenir balls.

Does that mean you were all unlucky? Sort of, but in different ways.

You were unlucky that a ball didn’t come your way, even though you were prepared. Your friends were unlucky because they had a great opportunity and didn’t prepare so couldn’t capitalize.

Where a foul ball lands is random. That part is complete luck. But your friends inability to take advantage of their good fortune was a choice. A poor choice.

If you and your friends go to enough games, they will likely keep dropping balls and you will eventually catch some. Over time, you might develop a large collection of balls.

Yet, most people would judge you as lucky for having all those balls while your friends had none. Or deem it unfair and demand you share some with your friends.

The truth is they should acknowledge that your actions created your “luck” and your success is actually attributable to skill while your friends outcome is related to a lack of skill.

Final observation – not all fans who bring gloves will catch the same number of balls over time. There is a random element. If you catch ten balls over a year and another fan with a glove catches seven, that difference is likely luck.

But the fact that that two of you have 17 total foul balls while your gloveless friends have 0 is not luck. It’s preparation.

Measuring Luck vs. Skill

As noted earlier, in inherently volatile professions like investing or cat reinsurance, it can be difficult to tell how much of results, even over the long term, are luck or skill.

For example, an underwriter who specialized in Florida hurricane for the last 25 years has much worse results than one who only writes California quake.

At least in Florida, we can compare results at one company vs. another to ascertain which did a better job limiting their risk. In California, we have no idea who is swimming naked.

This is why it is so important to assess processes and skill sets rather than outcomes. One reason I had a lot of success over the years investing around hurricanes is because I did a lot of homework in advance understanding damageability risk, steering patterns, unusual risks (New Orleans levees, NYC flood maps), etc.

Thus, when an event was approaching, I knew how to react to incremental news before the market could figure out what was happening. That was skill, not luck.

I’m not saying I never benefited from luck, but I also was hurt, at times, by bad luck. They tend to cancel out. Similarly, there were a lot of things I put the effort in to prepare for that never came to fruition, so I never was rewarded for them. It was a sunk cost.

In that regard, the times where I “caught the ball” made up for all the times I was unlucky and spent effort preparing for a rainy day in vain.

Thus, over the long term, the net benefit of that preparation should resolve itself as skill and not be cynically dismissed as luck.

A Recent Everyday Example

To make the one point one final way, let me share some recent events about how I created my own luck. This is something anyone can do and we have all, no doubt, dealt with.

My son and I were on a trip to visit colleges. We had a tight schedule with a visit each day and a flight each night. If we missed a flight, we would miss the next day’s visit and possibly further ones.

You may think getting from one city to another when you expect to is complete luck. I beg to differ.

You can prepare for the inherent volatility in airline on time performance and increase your odds of good luck. For example, I made sure to pick an airline with multiple flights each night and to not pick the last one, so that we would have backup options if there were delays.

The first flight went smoothly. The second one, not so much. There were weather delays leading to all the flights on the route being severely delayed.

One thing I do before any flight is look up the inbound flight, so that I can monitor it for delays. All the inbound flights were still on the ground at their origin city, so they were not arriving anytime soon.

After several hours of waiting, I noticed online that our flight (and only our flight) said it would eventually leave its current airport and reach us, but no longer showed it continuing on to our destination, even though the system at the airport said our flight still would eventually take off.

This set off alarm bells. I trusted the info about the inbound flight more than whatever the delay notification was at the airport for my flight.

So I called the rental car company and asked if I could change my reservation and drive to my next city (5 hours) since my plane probably wasn’t getting there tonight. They said I could.

Next, I asked the airline employee whether I should believe the info about the inbound flight and thus not wait around any longer and choose to drive instead. She was ambiguous but the body language told me our flight wasn’t going.

So, we left the airport and drove and got to the next city by 3 am. It made for a long day but at least we made it. The flight was cancelled after midnight (all the other flights eventually made it) so getting that head start on the drive made all the difference.

Was it luck that I got where I needed to while everyone else was stranded overnight? Nope, that’s called creating your own luck! My preparation let me make an informed decision.

I won’t belabor this but guess what happened the next day? That flight was cancelled before I even got to the airport!

I was going to have to wait a day and miss our next visit, but…I created some more luck. My wife looked up other flights options and found one later that night where you could still buy a ticket online.

When I showed this to the airline and said “if I can buy this seat on my phone, why can’t you just assign it to me so I don’t have to wait until tomorrow”, they did and we made it out late that night.

What’s the message here? Airlines suck, but beyond that, the message is we could have easily missed half our trip if we just relied on “luck”.

Instead, we took agency and created our own luck and had a successful trip.

Understand Your Risks

The lesson here is don’t leave things up to luck. Sure, it’s easier and yes, you can always make excuses that way, but you also end up with mediocre results.

Does my approach lead to a lot of wasted effort? You bet. There are plenty of cat events, financial crises, etc. that I did tons of research on but never happened.

But the return profile is asymmetric. That is the part most people don’t understand. If the wasted effort cost me the equivalent of $1, the successful efforts probably made me $10.

My best performance years were almost always during crises because I was prepared and knew how to “make the flight” while everyone else sat around passively.

One of the reasons I have written so much about the risk in MGAs of late isn’t that I hate MGAs or think they’re a bad model. Most of the time they’re a very sensible approach.

However, there are some pretty serious risks inherent to them and few people seem to have spent the time studying these.

So when things inevitably go wrong (and it is inevitable), their luck will be bad while those who made contingency plans (access to a balance sheet) will be heroes.

And no, this isn’t just about MGAs. That’s just the topic du jour. We can have similar conversations about fronting, cat underwriting, capital planning for tail events, investment risks, etc.

If you are in the insurance or investing businesses and you aren’t preparing in advance for what can go wrong, you have earned your bad luck.