Luck looks like genius

In 1929, US stock markets collapsed in part due to a rise in margin buying – using borrowed money to buy stocks. Even Benjamin Graham burned his fingers on leveraged bets. He learnt the hard way that getting rich through luck doesn’t count as investing skill.

This week, Graham's most famous student has written something that extends this lesson in an unexpected direction.

Warren Buffett, now 95 and stepping down from Berkshire Hathaway, recently published what may be his final extended letter to shareholders. In it, he makes a candid admission that most successful people avoid: "Through dumb luck, I drew a ridiculously long straw at birth." He goes on to detail the various ways fortune smiled upon him, from the timing of his birth to the people he happened to meet.

Here's what struck me most about Buffett's reflection. He's spent six decades being lionised as the world's greatest investor, yet he's utterly clear-eyed about the role of luck in his success. He doesn't claim that skill alone got him where he is. He acknowledges that being born in 1930s America, avoiding countless potential disasters and meeting the right people at the right time all mattered enormously.

Now contrast this with what happens during every bull market. Suddenly, everyone who bought stocks two years ago believes they possess special insight into wealth creation. The common thread? They've all confused fortunate timing with investing genius. They've forgotten – or never knew – that rising tides lift all boats, including the leaky ones.

Suggested read: The rising tide

This confusion between luck and skill creates real damage. When markets turn, as they inevitably do, these investors are bewildered. They thought they were skilful, but they were just lucky. Ben Graham learned this lesson the hard way in 1929. Despite his brilliance, the crash almost destroyed him because he'd been operating on borrowed money and borrowed confidence.

Buffett learned from Graham's mistakes, but he also learned something else – how to recognise the role of luck in success. This is perhaps the most valuable lesson, because it breeds the kind of humility that prevents catastrophic errors. If you think your success comes purely from skill, you'll take increasingly reckless risks. If you understand that luck played a role, you'll be more careful.

The current generation of retail investors desperately needs this understanding. I regularly encounter people who started investing in the past few years and genuinely believe they've cracked the code. They've made money, often substantial amounts, and they attribute this entirely to their analytical abilities or their willingness to take bold positions.

What they're really telling me is that they got lucky with their timing. They entered markets during an extraordinary period of liquidity and growth. But because they lack any experience of a genuine bear market, they don't understand how quickly fortunes can reverse.

Nassim Taleb calls this "mistaking a lucky draw for investing acumen." It's a trap that even sophisticated investors fall into, but it's particularly dangerous for those with limited experience. They've never learned to distinguish between signal and noise, between sustainable edge and random good fortune.

Buffett, after nearly seven decades of extraordinary success, still emphasises this distinction. He writes about "escaping banana peels, natural disasters, drunk or distracted drivers" and acknowledges that "Lady Luck is fickle." He's reminding us that even the most skilled investor needs fortune to smile upon them.

The practical lesson here isn't to discount skill entirely. Buffett clearly possesses exceptional business judgment and analytical ability. Rather, it's to maintain enough humility to recognise that outcomes depend on both skill and luck, and you cannot always control which matters more.

For retail investors, this means building strategies that can withstand both good and bad luck. It means recognising that a few years of strong returns don't make you invincible. It means understanding that markets are cyclical and your recent success may owe more to timing than brilliance.

Also read: What Buffett's farewell and India's 800× Sensex agree on