Investment Luck versus Investing Skill Articles

Can you really beat the securities markets?

Despite it being such a prevalent notion that is feed by the financial media and industry, you are not likely to beat the market. If you try to beat the market, you are more likely to trail the market’s return, because of costs, taxes, and investment mistakes.

Chance creates the illusion that investors can beat the stock market

Market efficiency makes it very difficult for individual investors to beat the market. Left to their own decisions, individual investors perform so poorly that on average their investment returns lag behind the returns that one would expect from a completely random stock selection process. The average professional trader does somewhat better than amateurs do and, in part, probably does so at the expense of the amateurs. On average, any actual performance advantage delivered by professionals is significantly less than the average fees they charge for their services.

Distinguishing between true investment skill and luck

Repeated investment success may still be the result of luck rather than skill. Only if an investor makes specific predictions about why the prices of certain securities prices will move in a particular direction and those predictions actually come true can investment skill be demonstrated.

The illusion of superior professional investment manager performance

If money managers were truly skilled at beating the market, then one would expect their excess performance prowess to persist over time. Unfortunately, the evidence indicates that superior past professional performance tends not to persist and is not a predictor of future performance.