In a recent article for the Collaborative Fund, Morgan Housel contrasts luck and risk as they relate to investing, arguing “you cannot understand one without appreciating the other.”

“This is the irony of investing,” writes Housel, “Risk and luck are different sides of the same coin, but we treat one as critically important, and the other like it doesn’t exist—at least for you, when you succeed.”

Housel offers the following insights/comparisons:

• Investors should quantify both. “Benchmarch that a portion of your success was caused by luck and isn’t’ structurally repeatable, and you’ll better handle the reality that competitive pursuits are a continuous chain of stress and challenge.”
• Risk, Housel argues, “doesn’t care about how much effort you put into something, and neither does luck. Both just show up, unannounced, eager to humble you.”
• Both luck and risk mean different things to different people.
• “Experiencing risk reduces confidence when it should merely highlight reality. Which can make people more conservative than they should be.”

Housel concludes: “Realizing that both luck and risk are an ever-present and normal part of the game makes you accept that not everything is in your control, which is the only way to identify and focus on whatever is in your control.”