I’m really on a Michael Mauboussin kick here with all the press he’s doing for his new book. Combined with some good insights from Jason Zweig, I found this article pretty entertaining:
“Michael Mauboussin, chief investment strategist at Legg Mason Capital Management and author of “The Success Equation: Untangling Skill and Luck in Business, Sports and Investing,” published last month, has some answers to this puzzle.
Precisely because most professional investors are so skillful, he says, their results end up being differentiated largely by luck, much the way contests between equally matched great athletes are often decided by a bad bounce of a ball. Just as athletes rarely admit that luck turned the tide, investors attribute differences in performance to skill alone.
In one classic experiment, people guessed the outcome of a coin toss. When told they got the first four tosses correct, they concluded on average that they would be able to guess 54 of the next 100 coin flips. “When you observe a good outcome,” Mr. Mauboussin says, “your mind concludes that there must be a good process going on.”
So when a fund puts up good numbers, you will naturally be inclined to think it has a sustainable edge.”