Luck and the Markets

Hard work only goes so far...

NOTHING beats luck! Then, luck beats you, writes Daily Reckoning founder Bill Bonner.

Want to know the secret of success? John D. Rockefeller explained it a century ago. 'Get to work early. Work late. Strike oil.'

'It's amazing how lucky I get when I work 14 hours a day, 'said a famous workaholic.

But a lot of people who work 14 hours a day don't get lucky. They just get tired. They drill dry holes. They run for president...and lose. They do careful stock market research...and the stocks go down anyway.

What's the real secret? Napoleon knew what it was. He said he didn't want smart generals; he wanted lucky generals.

That's not to say that luck is everything. You have to be ready for...and worthy of it. How? By working hard. There are certain basic requirements for anything.

If you want to be a plumber, you've got to learn your pipes. If you want to be an economist, you've got to know your mumbo-jumbo. And if you want to win a Nobel Prize, you've got to do something that the Nobel committee might consider worthwhile.

All of those things are more-or-less under your control. And if you want to get lucky in your career or your investments, you have to lay the groundwork; you've got to put in the hours.

But then...it's a matter of luck.

Everybody knows Warren Buffett is a genius. But there are a lot of geniuses in the investment world. And not all of them are Warren Buffett. What makes the difference? You got it — luck!

He was buying solid stocks in an intelligent way in the middle of the biggest financial boom in history. Here's Bloomberg, on the case:

'Bill Gross, manager of the world's largest mutual fund, said the most renowned investors from Warren Buffett to George Soros may owe their reputations to a favorable era for money management as expanding credit fueled gains in asset prices across markets.

'The real test of greatness for investors is not how they navigated market cycles during that time, but whether they can adapt to historical changes occurring over half a century or longer, Gross, 68, wrote in an investment outlook published today entitled 'A Man in the Mirror,' named after a song by Michael Jackson.

''All of us, even the old guys like Buffett, Soros, Fuss, yeah - me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience,' Gross wrote. 'Perhaps it was the epoch that made the man as opposed to the man that made the epoch.''

What was unique about the epoch — 1980–2007 — was that it was the final stage of a huge, private sector credit expansion. There were many reasons for this phenomenon, in which total US debt went from about 150% of GDP to over 350%.

The main reason was that the US was lucky. It has the world's reserve currency. People used the Dollar as they once used gold. They thought they could trust it. So, when the US sent a Dollar overseas, the foreigners were happy to take it...and keep it. They still are.

This huge credit expansion meant that consumers could buy things without fully paying for them. The foreigners took their Dollars...and held onto them. They never asked for anything else in return.

It also meant that businesses in the US were able to earn revenue with no offsetting labour cost. People were spending money they never earned...that is, money that US businesses never paid out in wages.

They were living on credit — on earnings that were supposed to take place in the future. This meant business revenues were higher than usual...and their costs were lower.

It was a great time to be an investor. It was a great time to be a consumer too. We were all lucky.

But luck runs out. For five years now, the US private sector has been trying to deleverage — while the public sector insists that it borrow more. Result: economic stagnation. Also, US consumers have watched their wages and family incomes fall for more than ten years.

And US investors — led by Warren Buffett — have been unable to stay even. Adjusted for inflation (however you calculate it) investors are still below where they were in 2000.

And now, the world has changed...almost the opposite of 1980, when the big boom began. Today, stocks are expensive, not cheap like they were in 1980. Interest rates are low, not high like they were in 1980. Total debt is now around 350% of GDP, not 150% like it was in 1980.

Hope to make a lot of money in stocks or bonds now? Good luck!