By Mo Fakhro

There was once a family in Jerusalem that had all the luck.  For they were a family of pigs.  The only family of pigs in all of Jerusalem.  The Israelis were always afraid of being killed by the Palestinians.  The Palestinians were always afraid of being killed by the Israelis.  The goats, cows, and chickens lived in constant fear of being eaten by both the Israelis and the Palestinians.  So too was the plight of the fish in the sea. The small fish afraid of being eaten by the big fish, and the big fish afraid of being eaten by the Israelis, the Palestinians, and the occasional sea gull.  Everyone lived in constant fear of being killed, except for this lucky family of pigs.  They were shunned by the Jews and the Muslims, who had been told by God that they could not eat them, and so, they roamed the lands freely without a care in the world. 

This is a fictional story that I have just made up to illustrate a point.  The point being that luck is determined to a great extent by the accident of where and when you are born.  If this family of pigs had been born two thousand years before, a miniscule amount of time in the history of the world, they would have been eaten by humans.  If they had been born a few hundred miles to the West, in Europe, they would have been slaughtered and converted to bacon.  Survival in this world for this family of pigs, will have been determined by the accident of when and where they were born. 

We are all lucky to be alive if you really think about it.  It is a complete miracle that each of us is alive today.  We have to be the lucky one out of millions and millions of sperm cells that makes the treacherous journey into its egg.  To add to that, our parents need to have met, and our grandparents, and our great grandparents, an almost infinitely high number of coincidences, just so that we could be here today.  It is clear that luck plays an important role in our lives, since we are all so lucky just to be alive.

Is it then surprising that success in the stock market is determined by luck?  Or that successful entrepreneurs are lucky? Is Bill Gates smart for creating Microsoft or lucky? What about Jeff Bezos or Elon Musk? What about Warren Buffett or Peter Lynch? They are surely smart.  No one can realistically doubt that.  But how much of their success is based on luck and how much of it is based on smarts? I would argue that their success is primarily due to luck.  To begin with, they are lucky to be alive for the same reasons I mentioned earlier, just as we all are.  Furthermore, if they had been born 2000 years ago, they may not have excelled at hunting for animals the way that they excelled at writing software or finding value on the stock market.  If they had been born a few thousand miles to the east, in Africa, they may not have excelled at corruption or warfare, the way that they did at more intellectual pursuits.  Elon Musk was born in Africa, but we all know he is not really a human anyway.

What determines success on the stock market, and what role does luck play in that? It is a question that has baffled economists for decades.  The Efficient Market Hypothesis, on which much of classical financial thinking is based, implies that it is impossible to consistently “beat the market”, because markets are perfectly efficient.  What this means is that all available information about a stock is priced into it, and that any opportunities are immediately eradicated by arbitrage.  In recent years, a new branch of finance has emerged named Behavioral Finance.  In this branch it is assumed that humans are driven not only by rationality but also by emotions.  They tend to get overly cautions when they lose money and overly confident when they make money, in a way that impacts the rationality of their subsequent financial decisions.  It also assumes that investors are influenced by their own biases and are thus not perfectly rational in their thinking.  Using the pigs’ analogy, if we took the family of pigs on a boat from Jerusalem to London, they would still roam freely without a fear in the world, until they invariably will have come across a restaurant serving pork chops. 

Do the current investors in the stock market resemble the pigs that got transported to London? Could it be that they are too young to remember the 2000 crash, or the 1987 crash? Are they too optimistic because they have never seen blood on the streets? Is a crash on the way that will turn their Robinhood portfolios to pork chops? Is the market driven now by irrational exuberance, as it was during the late 1990s? Of course, the truth is that only time will tell.  We are living through unusual times that may lead to consequences that are difficult to predict. 

The Luckiest Family in Jerusalem