The Paradox of Skill

MJG

Hi Guys,

I like Michael Mauboussin. He writes and lectures clearly on investment understanding often using academic research and sports analogies to support his primary themes.

A year or so ago he was interviewed by Steve Forbes on his Intelligent Investing series. It is a 27 minute presentation now accessible on YouTube. Mauboussin emphasizes three primary themes in the discussion: The tradeoff between skill and luck in an investment world that is populated by highly skilled professionals, a regression to the mean marketplace bias, and long-term patience when investing. He states that persistency in outcomes is a measure of an investors overall skill level.

Here is the Link to this insightful interview:



Skilful investors do exist, but in a sophisticated investment universe dominated by highly trained professionals, luck often trumps skill since skill neutralizes itself.

Please take time to visit the presentation. It is both entertaining and includes some actionable investment guidelines. Enjoy.

Since the video is a little dated, if it has been referenced here on MFO I do apologize for the repetition. Even so, some lessons are worth repeating.

Best Regards.

Junkster

Thanks MJG. I have always been a firm believer in the luck factor when it comes to trading/investing. One of my five favorite books of all time is the Luck Factor by Max Gunther (not to be confused by a rip-off of the same title but different author) The last part of that book delves into the five characteristics of the lucky and the things you can do to influence your luck. I especially like the third luck adjustment factor - Fortune Favors the Bold - and how it applies to trading and investing. I should add the fourth factor is also very applicable to trading/investing - The Ratchet Effect. Lucky people have a habit of getting out of deteriorating situations quickly.

David_Snowball

His talk was one of the more interesting at the Morningstar conference this summer. Here's my abstract of it, from our July issue. The link goes to the original discussion from when I posted the note to the board during the conference.

For what it's worth,

David

DAY ONE: MICHAEL MAUBOUSSIN ON LUCK AND SKILL IN INVESTING

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). Here’s his 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, Williams’ 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.

This spurred a particularly rich discussion on the board.

MJG

Reply to @David_Snowball:

Hi David,

Thank you for the reminder that Michael Mauboussin was the subject of an MFO exchange earlier this year. With your nudge, I hazily recall that I participated in that discussion. I am a big Mauboussin fan and own several of his books and extended research papers.

Also, thank you for referencing the Ted Williams story, especially since it is Veterans Day. Ted Williams is a true American war hero. He served as a fighter plane pilot in both World War II and the Korean conflict. He was an Air Force ace in both engagements. I do not envy those enemy pilots who had to compete against a man with his visual and hand-eye coordination skills. Those who did were overmatched and paid the price.

The Williams baseball legend is that American League umpires didn’t call strikes against him if he failed to swing at a pitch. If he didn’t swing, it was not a strike. I doubt if any modern ballplayers will ever enter the elite “400” hitters club. Today, all the competitors are just too skilful.

Thanks again for your participation in all Mauboussin discussions. The more his body of work is exposed to MFO members, the better will be our investing performance.

Best Wishes.