Skill or luck?

Summary: Investing often looks like genius when it’s just good fortune. This story unpacks why separating skill from luck is vital, how even top performers can regress to the mean and why process—not outcomes—should be your investing North Star. In the world of investing, distinguishing between genuine skill and mere good fortune is paramount for long-term success. Was a fund manager’s exceptional performance last year a testament to their unparalleled insight, or simply a lucky break? As explored in Michael J Mauboussin’s ‘The Success Equation’, most outcomes in life and business, including investing, are a complex blend of both skill and luck. For serious investors, understanding the relative contributions of these two forces is not just an academic exercise; it is crucial for accurately interpreting past results, making better future decisions, and ultimately, achieving greater investment success. The fundamental challenge lies in our inherent difficulty in separating skill from luck. Unlike activities where skill almost entirely dictates the outcome, such as chess or running races, where deliberate practice consistently improves performance, investing often resembles games of strategy and chance like poker. While a chess grandmaster will almost always defeat an amateur, the outcome of a roulette spin or a lottery drawing is purely random. Mauboussin offers a practical framework for separating skill from luck in any domain: if you can lose on purpose, skill is involved; if you can’t, then it’s pure luck. Investing falls somewhere in between, with skill being best defined as a process of making decisions that, over time, can lead to good outcomes, even if individual decisions may suffer unwelcome short-term consequences due to bad luck. An illustration of luck’s powerful influence in the short term comes from an exercise where amateurs were asked to select stocks; the winning amateur’s picks significantly outperformed the market and over 90 per cent of active money mana

This article was originally published on September 01, 2025.