The "Too Good to Be True" Trap: Understanding Luck vs. Skill in Investing

We have all heard of someone falling into a Get Rich Quick Scheme & actually ending up way poorer. Maybe your sketchy brother in law doubled his money on a "hot tip", or your neighbour claims he has a "secret options strategy" that never fails & obviously your friend invested in ponzi schemes to get “amazing returns in 90 days from Laxmi Chit Fund & Co.”.

You start wondering—should I also jump in and ride the next wave? 

Stop right there. Before you start imagining your face on CNBC giving Diwali stock picks, or on Shark Tank India let’s talk about the biases that blur the lines between a lucky gambler & a skilled investor.

The Survivorship Bias: Why We Only Hear About the Winners

Give me any professional football player in the world you hate & I will show you a video showcasing all his career highlights, making you believe he was excellent.You’d think every player was a genius, every shot was perfect, and there were zero mistakes. That’s exactly how survivorship bias works in investing.

We all know of players who have played a few seasons, been sensational & then slacked off, but how do we separate the sheep from the GOAT (you see what I did there? 🙂).

Same way as they did in the above example, through vast amounts of data collected over time.

Only few will stand the test of time.

Another example - take India's famous "multibagger" stocks, Infosys, TCS, or HDFC Bank. We hear about early investors making crores but rarely about the hundreds of companies that were just as hyped but sank like the Titanic. 

Remember Satyam Computers? Reliance Power? 

If you had bet on them thinking they were the next big thing, well… let's just say your portfolio would need life support.

A 2018 BSE study showed that out of 5,000 listed companies, nearly 50% had either shut down or become penny stocks. 

Yet, financial news and influencers never talk about these failures because—let’s be real—who wants to read about disasters when success stories are so much sexier?

Meet Ramesh and Suresh: A Tale of Timing vs. Skill

Ramesh – The Fortunate Investor

• Ramesh entered the stock market in March 2009, right after the Global Financial Crisis (GFC) had sent markets crashing.

• At the time, the Sensex had plunged to nearly 8,000 points, a steep drop from its 2008 peak of 21,000.

• Without extensive research, he invested in a mix of blue-chip stocks, simply following his intuition.

• Over the next decade, the Sensex soared past 60,000 by 2023, generating massive returns.

• His portfolio grew 7x in 14 years—not because of superior stock-picking skills, but because he invested at the market’s lowest point.

  
  

Suresh – The Skilled but Unlucky Investor

• Suresh, on the other hand, started investing in January 2008, just before the market hit its peak at 21,000.

• He did his homework, carefully selecting high-quality stocks but the crash wiped out half the market’s value soon after.

• Despite making sound investment choices, it took him years just to break even.

• He remained disciplined, kept investing, and by 2023, his portfolio was in profit—but his overall returns lagged behind Ramesh’s simply due to bad timing.

Key Takeaway:

• Ramesh wasn’t a better investor—he was just lucky with timing.

• Suresh had strong investing skills but entered at the worst possible moment.

• If investing were purely about skill, their returns should have been similar. But market cycles play a huge role.

This is why long-term investing matters—even if you enter at the wrong time, patience and consistency can still lead to success.

Even India’s legendary investor Rakesh Jhunjhunwala admitted that luck played a role in his success. He started in the 1980s when India was opening up its economy. Right place, right time.

A 2019 SEBI report found that only 10% of active traders make consistent profits. If trading were purely about skill, wouldn’t that number be much higher?

How to Separate Skill from Randomness

If luck plays such a big role, how do we identify real investing skills? Here’s what actually matters:

1. Consistency Over Time

A one-time jackpot doesn’t mean skill. Look for investors or fund managers who have outperformed the market across multiple cycles. If they’ve done well in both good times and crashes (think 2008, 2020), they’re more likely to know what they’re doing.

2. Risk Management

Ever met someone who only brags about their winning stocks? Ask them about their losses. True investors focus on risk, not just returns.

Warren Buffett’s #1 rule: Never lose money. Rule #2: Never forget Rule #1.

3. Adaptability

Markets change. What worked in the 1990s won’t necessarily work today. The best investors adapt.

Take the example of PPFAS (they decided to invest in the early 2010s in US stocks when people had not even heard of it), they realised the massive opportunity that those tech stocks were unlocking and adapted their investment strategy.

Meanwhile, investors who stuck to old-school PSU stocks in the 2000s were left behind as private players took over. Adapt or perish.

The Psychology of "Too Good to Be True" Stories

Why do people fall for unrealistic investment success stories? Simple: greed and FOMO (Fear of Missing Out).

• In 2021, everyone was buying cryptocurrency, convinced Bitcoin would hit ₹1 crore. By 2023, many lost 60-70% of their investments.

• Remember Anil Ambani’s Reliance Communications? Once a "can’t-fail" stock, today it’s nearly worthless.

What You Can Do Instead

1. Ignore "hot tips" and influencers promising quick riches. If someone had a surefire way to make crores, why would they be selling courses instead of using their own "secret formula"?

2. Think long-term. The best investors don’t chase short-term gains; they build wealth over decades.

3. Diversify. Don’t put all your money into one stock or asset class. Even the best companies can fail.

4. Keep learning. Read books, study financial history, and understand how businesses actually make money.

Smart Investing Over Blind Speculation

Investing success is a mix of skill, patience, and—yes—some luck. The key is knowing when luck is driving returns rather than skill. Be skeptical of overnight success stories, focus on long-term growth, and never stop learning.

As Charlie Munger said, "The big money is not in the buying and selling, but in the waiting."

So, invest wisely, stay patient, and don’t fall for the "too good to be true" trap.

Because, let’s be honest, if making money were that easy, we’d all be sipping cocktails on Thai beaches by now.