Share Price Goes Up, Luck or Skill?

Does a good outcome represent a good decision? Most of you might agree with the statement but in fact it is only partially true. Think about a speculator who over-leveraged to magnify his outcome resulting in a return on investment of 100% a year. The outcome was good, after all, who would consider a 100% ROI as bad? However, does it mean that it was a good decision to be over-leveraged? I think you've got my point.

Most of us have a general belief that if the outcome is good, the process of creating it is equally sound. But this is only partially correct as a good outcome can be produced purely by luck. The investors might not have a glue on what they have invested therefore their decision will be shaken when bad news about the company are circulating. 

Yet, a bad outcome does not mean that your decision making process was flawed. It can be caused by reasons beyond control. Not to forget that one will run out of luck and a bad decision making process will most likely lead you to a bad outcome. Randomness or luck can create any outcome in the short term. The long term success, however, is due to a sound decision making process.

For instance, you have made an investment into a good and undervalued business, the share price tanked by 10% in a month. This outcome is certainly bad for the short term view. However, one must remember that if your decision making process was right and sound, Mr. Long Term will prove you right with an eventual rise in share price.

Source: Bursa Market Place, M3 Technologies (Asia) Berhad

This company was mentioned previously, click here to read more. It had a bad financial track record, possibly due to a bad management in place. If an investor invested on Feb 29, 2016, he would have made a substantial gain on May 23, 2016. Was the outcome good? Yes. However, was the decision making process good? Not at all.

Source: Bursa Market Place, M3 Technologies (Asia) Berhad

As a result, the stock price fell by a staggering 44% in a day. On July 4, 2016, the share price was even lower than the purchase price. Some might be lucky enough to sell off before the sharp plunge, but I believe most of the investors suffered huge losses as a result of a bad decision making process!

So What's the Lesson?

Focus on the process more than the outcome. Short and succinct.

Thank you.