Skill vs luck

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  By Guest Blogger Doug Rowat

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Last week, a client expressed to me that the current market environment felt exactly like 2008 and added that they’d made the decision back then to move most of their portfolio to cash.

A good decision in hindsight, but I highlighted that such decisions need to be made repeatedly to determine whether they have genuine skill for predicting market crashes. More likely, the past decision was luck.

Identifying true skill requires forecasts being tested over and over. A successful decision only equates to skill if it can be repeated. Investment strategist and author Michael Mauboussin highlights as much using sports as a simple example. Skill here is measured by outcomes over thousands of trials. Steph Curry’s almost 10,000 three-point attempts, for instance, with a better than a 42% success rate is an example of the influence of skill in basketball. Few other sports invite as many scoring attempts with as high a potential success rate. Unsurprisingly, basketball ranks higher than the other major sports on the luck-skill continuum:

Activities along the luck-skill continuum

Source: Michael Mauboussin

Investors, meanwhile, exhibit little ability to influence better outcomes no matter how often they try, and investing therefore ranks much closer to the luck end of the luck-skill continuum.

Ultimately, Mauboussin concludes that “investing, especially over relatively short periods of time, is more a matter of luck than of skill.”

It’s also important to never confuse superior performance with the results that you might achieve simply from luck. Again, my client made the right decision in 2008 but would need to consistently replicate this success to reveal true skill. Did they correctly anticipate the sudden Covid bear market of 2020, the inflation-crisis bear market of 2022, or the Liberation Day near–bear market earlier this year? Or correctly anticipate any other market calamity for that matter? You get the idea.

Conflating one-time success (luck) with skill occurs not just with amateur investors but with professional mutual fund managers as well. Mutual fund managers may make a few correct investment decisions at certain times, but the evidence suggests that these decisions can’t be consistently replicated. S&P Indices Versus Active (SPIVA) outlines the problem of ‘persistence of performance’ and shows that almost all mutual fund managers who do well for a time can’t maintain their success. The below chart, for example, illustrates how US fund managers fail to ‘persist’ with good results:

Only about 2% of all large-cap equity funds remained in the top half over a five-year period.

Click to enlarge. Source: SPIVA

SPIVA ultimately makes a similar conclusion to Mauboussin: “…active outperformance, when it occurs, tends to be the result of luck rather than genuine skill.” In other words, skill only distinguishes itself from luck if the successful results can be maintained.

And finally, if you want even clearer proof that investing deserves its ranking in Mauboussin’s luck-skill continuum, look no further than the annual ritual of Wall Street analysts trying to forecast the performance of the S&P 500 for the upcoming year. Since 2000, Bespoke Investment Group has compared the yearly Wall Street predictions with the actual market results and found that the variance between actual performance and the prediction was a staggering 14.2 percentage points. In other words, these so-called expert investors aren’t just, figuratively speaking, missing the basket, they’re shooting the ball into the stands.

Reasonable long-term rates of return can be achieved through balanced and diversified portfolios utilizing low-cost ETFs, and downside reduced through careful risk management and proper asset allocation. But investors, collectively, are never going to consistently nail equity-market three-pointers.

Most investors need to remind themselves of who they’re not:

The Precision Of Steph Curry Is Incredible
by inBeAmazed

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/10/25/skill-vs-luck/