Stock picking is part science, part art,
part luck, part intuition, and always uncertain - "not precisely knowing." - Author?
Investment is luck or skill? Michael Mauboussin resolves the mystery
The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael J. Mauboussin
How did this book come about?
The topic of skill and luck is something I've thought about a lot over
the years, especially in the context of sports — where I have been an
avid participant and a fan all of my life — as well as business and
investing. Skill and luck is interesting in the sense that everyone
knows it's important but there's been relatively little done on it.
There is work on each of the components, including skill, luck,
reversion to the mean, but nowhere is this all brought together.
Further, I had enjoyed a number of very popular books on randomness and
luck, but felt they emphasised more the fact that luck is pervasive
rather than how to figure out how much luck there is in an activity and,
most importantly, what to do about it.
How do you define luck?
I suggest that there's luck in an activity when three conditions are
met. First, it applies to an individual or organisation. Second, it can
be good or bad. And, finally, it is reasonable to expect that a
different result could have occurred. I also like to distinguish between
randomness and luck. I view randomness as operating at a system level,
and luck at an individual level. For example, if I gather 100 people and
ask them to call consecutive coin tosses, randomness tells me how many
will call 4 in a row correctly. If you are the one who calls them right,
you are lucky.
Note cases where luck wouldn't apply. For
instance, Warren Buffett has often said that he was lucky to have been
born when and where he was born. But by the definition I have adopted,
that is not lucky because it is not reasonable to expect a different
outcome could have occurred. Only he could have been born to those
parents at that time. Now he may have been fortunate, but by my
definition he was not lucky.
You say investing is a mix of skill and luck — how exactly does that work?
One way to think about it is that skill reflects elements under your
control and luck reflects elements outside your control. So in the
context of investing, you can identify things within your control: which
stocks you select, how diversified your portfolio may be, how your
portfolio is positioned based on various possible economic outcomes.
But there's a great deal that will be out of your control, including
macroeconomic developments, unanticipated behavior by the customers or
competitors of a company in which you hold stock, and broader
technological change.
So investing will have elements of skill
and luck. The key question is how much does each element contribute to
long-term results. The answer, by the way, is that luck is a major
factor for investment results over the short term but skill is relevant
over the long haul.
Read? Luck and Skill???
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