Skill vs. Luck in Investing, Business and Tomorrow’s Big Games

Here we are three weeks into the new year. It looks like the economy will continue its slow, upward slog back up the mountain of optimism and the Fed will wean us off its QE stimulus program. Sure interest rates are likely to rise, but most of the experts we have consulted agree there’s still some nice upside to the equity markets. The difference is it won’t be as easy as it has been the past two years and there won’t be as many “geniuses” anointed by the financial press this time a year from now.

Since many of your firms are directly or indirectly tied to the investment world, now is you time to shine—not to be worried. If you’re smart, you’ll position yourself as a thought leader--not a follower—and use this financial climate to distance yourself from the pack.

As Investment News noted this week, “Most investors are fairly optimistic that 2014 will be a decent year for performance, but financial advisers intend to inject a little more caution into client conversations.” According to a new survey of 302 advisers sponsored by Janus Capital Group and completed by Market Strategies International, 93 percent of respondents cited rising rates as one of the top five most important topics to discuss in 2014.

This might mean tougher sledding in the equity markets and some tougher client conversations. But it’s when professionals with true skill will distance themselves from those who’ve been merely lucky.

NFL playoff predictions and market expertise

Back around Thanksgiving time, a number of you participated in a Market 2014 Forecast article that we edited for our client CEG Worldwide. We’re pleased to announce that many of your predictions seem to be coming true, including the likely winner of the Super Bowl. At the time we checked in with you, about 16 teams had a realistic shot of making the playoffs, but as a group you chose only one of three teams to win it all (Denver, Seattle or San Francisco). As the final four teams head into tomorrow’s conference championship games, all three are still alive and two are favored to win.

All four teams in tomorrow’s conference championship games are stocked with great athletes, great coaches and veteran teams with ample playoff experience. They’re evenly matched and there won’t be any easy touchdowns, so it may come down to whoever makes fewer mistakes, manages the clock better or doesn’t choke under pressure. In other words, skill.

Conclusion

Speaking of skill versus luck, several of you have recommended Michael Mauboussin’s thought provoking book “The Success Equation: Untangling Skill and Luck in Business, Sports and Investing.”

We agree with that recommendation. Mauboussin, an investment strategist at Legg Mason Capital Management, uses a combination of rigorous statistcs and real-word anecdotes to explain how we can really learn to distinguish how elements of skill and luck factor into so many important aspect of life and learn to make better, more confident decisions.

DISCLOSURE: We have not ties to the author, publisher or any of the online retailers that carry this book.

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TAGS: Luck versus skill, David Mauboussin, NFL Playoffs, Super Bowl contenders, Legg Mason, Investment News, Janus Capital