Is succesful investing down to skill or luck?

What is considered to be the best ever performing investment fund in history is one that most of us have probably never heard of. It’s not Buffet’s Berkshire Hathaway. It’s the Medallion Fund run by Renaissance Technologies.

From 1988- 2021 the fund has returned 62% per annum before fees.

It’s run not by traditional investors who look at company accounts but by some of the top mathematicians in the world who use models and algorithms to trade in financial markets. They find patterns in the data and exploit them. The average holding period for shares in the fund is two to three days and half the time the managers of the fund don’t know what shares they own.

Why can’t we access this in our SIPP you ask?

Because it has been closed to outside investors since 1993. The managers of the fund are running their own money and make so much for themselves that they don’t want to let anybody else in on their secret. Would you?

The Renaissance fund is the exception that proves the rule that you can’t beat the market consistently.

This is true Alpha or skill. The ability to make money and outperform regardless of whether the market is up or down. But it can only be achieved if the fund is relatively small and nimble- the fund is capped at $5bn. It also requires a massive amount of computing power.

Everybody else is arguably just lucky!

In a book called The Success Equation, Michael Mauboussin used statistical analysis and estimates from historical data to show where activities fall on the scale of luck or skill.

On the pure luck side, sits roulette for example. On the pure skill side, sits chess.

Football is somewhere in the middle. The ball can fall in certain way, there are injuries, unforced errors. Luck is involved.

Investing according to this study, falls closely to the luck side of the equation. There are only a small number of investors that have the skill to create returns over and above the fees that are paid. People like the managers of Renaissance. That’s why costs are so important.

And as participants get better and better at an activity (as for example technology improves and investment information is very quickly disseminated and analysed) then luck plays a much more important role in determining who wins. Over the very long term however one thing is evidently true if history is our guide – investment in equities appear to have  good returns.

So perhaps more important than luck or skill is simply patience


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