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Skill-vs.-Luck Investing Has Risky Effects

After a few months of "skillful" trading, luck may have run out on the group... at least for the time being.

The conclusion drawn by Seawright is the need focus on process in order to achieve investment success to which I would add the word discipline. When you can truly accept the role luck plays in investing it then becomes much easier to focus on process and when you know you have a process that can lead to long-term investment success it makes it easier to remain disciplined to your chosen process.

By remaining disciplined you will create your own luck.

This is especially true in 2013 as the year winds down to an end. If you adhere to some sort of investment strategy other than indexing then you have likely lagged behind the S&P 500's 27% gain. Just as Bill Miller realized he would not beat the market every year, neither can anyone else.

If your investment strategy has lagged behind the S&P 500 index you might be tempted to switch to indexing because of how well it did this year. Doing so would be an undisciplined disregarding of process. Through most of the last decade no one wanted to touch indexing with a ten-foot pole as the S&P 500 endured a volatile round trip to nowhere; from March 10, 2000 to May 9, 2007 the index was unchanged. Indexing was no worse back then as today, it just so happens that indexing has beaten most other strategies this year after lagging so many strategies before.

Giving up on a strategy because of impatience once is likely to be repeated in the future which results in repeatedly chasing what was hot last year which will inhibit investment success. If your equity portfolio is up 10 or 20%, your process is not broken, 2013 just one of those years where your process wasn't the best performer and that is ok because no process can be the best performer every year.


At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Stock quotes in this article: DDD, XONE, VJET, LMVRX 

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