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Morningstar, Day One: Michael Maubuissin on luck and skill in investing – in 150 words

David_Snowball
edited June 2013 in Fund Discussions
Mauboussin works for Credit Suisse, Legg Mason before that and has written The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing (2012). The Paradox of Skill: as the aggregate level of skill rises, luck becomes a more important factor in separating average from way above average. Since you can’t count on luck, it becomes harder for anyone to remain way above average. Ted Williams hit .406 in 1941. No one has been over .400 since. Why? Because everyone has gotten better: pitchers, fielders and hitters. In 1941, William’s average was four standard deviations above the norm. In 2012, a hitter up by four s.d. would be hitting “just” .380. The same thing in investing: the dispersion of returns (the gap between 50th percentile funds and 90th percentile funds) has been falling for 50 years. Any outsized performance is now likely luck and unlikely to persist.

Comments

  • MaxBialystockMaxBialystock
    I follow. Fascinating. We shouldn't all switch to index funds, then...?
  • MJG
    Hi Guys,

    Mauboussin loves to talk about the skill/luck tradeoffs. Here is a Link to a video by him titled " Untangling Skill and Luck in Business":



    Enjoy.
  • CharlesCharles
    edited June 2013
    Reply to @MaxBialystock: Not me so much for passive. I'm not as interested in 4 sigma winners as I am in say persistent half sigma winners. I'll venture to say that there are quite a few of those, which I will attribute to skill=). And, I certainly want to avoid persistent minus half sigma losers, which I'll admit, you achieve with a passive index fund. Suspect that is why so many funds revert to being benchmark huggers - to avoid being deemed a loser.
  • VintageFreakVintageFreak
    Sorry guys, I don't need PhD to figure out my answer. Active management = Manager Risk. Know thy manager then invest. Market Risk = Buy index fund.

    Most people should buy index funds. I dare say most people at MFO are not most people and know what they are doing.
  • Old_JoeOld_Joe
    edited June 2013
    Reply to @VintageFreak: Now that's an unwarranted assumption, at least in my case! Once I did think that I knew what I was doing, but later they told me that I'd been on drugs.
  • davidrmorandavidrmoran
    >> Any outsized performance is now likely luck and unlikely to persist.

    I guess I should watch his video, but this last sentence may show fundamental misunderstanding. 'Unlikely to persist' is altogether different from luck, depending how you define things. Ted Williams wasn't a lucky batter....
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