Don’t Mistake Luck for Skill. The correctness of an Investment Decision cannot be judged from the Outcome. When I worked as a Stockbroker I spoke with Dozens of Investors everyday. Many had proudly watched their Investment Portfolios grow substantially during the past 8 years. Some bragged about being Stock-Picking Geniuses.
What they didn’t realize is that they were measuring their performance over a very short Time Horizon, during One of the Biggest Bull Markets in American History. In Boom times, the Highest Returns often go to those who take the Most Risk. That doesn’t say anything about their being the Best Investors. How would those same Risk Takers’ Portfolios Perform during a Bear Market? You must consider “Alternative Histories,” the Other Things that Could Have Happened.
A Good Decision is one that’s Optimal at the Time it’s made, when the Future is by Definition Unknown. Thus, Correct Decisions are often Unsuccessful and Vice Versa. It’s Essential to have a Large Number of Observations…Lots of Years of Data before Judging an Investor’s Skill. As Warren Buffet says, “Only when the Tide goes out do you Discover who’s been Swimming Naked.”
A lot of Folks have been Swimming Naked during the past 8 Years. I Wonder how Lucky They will feel when the next Tide goes out…
So, What do you think? Have you ever confused Luck and Skill? I would Love to hear about it.