
Investing Is More Luck Than Talent - dnetesn
http://nautil.us/issue/44/luck/investing-is-more-luck-than-talent
======
scottmsul
I've read a bit into econophysics. In stat mech, the exchange of energy
between atoms is assumed to be random. When the exchange of energy is random,
the resulting distribution of energies is a Gibbs distribution, which means
that the probability of atoms with higher energies falls off exponentially.

The application is that if you replace energy with money, and atoms with
people, then the same equations hold for a model of people who randomly
exchange money. Therefore if investments were truly random, you would expect
the distribution of investors' wealth to follow an exponential distribution,
not a power law! This directly contradicts the article.

Interestingly enough, the bottom 99% follows an exponential distribution,
while the top 1% follows a power-law, and the transition is very sharp (eg,
wealth plots have a "kink" in them).

Brief introduction to econophysics for the mathematically inclined:
[https://arxiv.org/abs/0709.3662](https://arxiv.org/abs/0709.3662)

~~~
josephdviviano
Thanks for the paper, very interesting. All the below is total speculation as
I am no 1%er ;).

Curious that there's such a sharp change in distributions. It seems like the
top 1% participate in a very different sort of financial network than do the
remaining 99%. Since the majority's wealth follows such a basic physical
theory, their organization must be completely unstructured.

For the 1%, then, the question is what the structure is. It might be 'scale
free' network [1], or fractal, so it could be due to preferential attachment
[2], which would mean those who have lots of money find it easier to make more
money (via things like investments or rent-taking), or due to competition
between fit nodes [3], which would make sense in that those in the 1% are
likely to be merging / acquiring others.

I guess what this means isn't too surprising: if you aren't in the 1% now, you
need to claw your way in before you can take advantage of these network
effects to grow your wealth in any meaningful way. If you aren't in the 1%,
you might be successful, but it will be mostly due to luck.

But I wonder if the network effects can be taken advantage of without the
wealth to start. Following this line of thinking [4], the wealth flows due to
social networking, not due to financial networking. If you can connect with
the 1%'s social sphere, you stand a much better chance at becoming a part of
that financial class.

[1] [https://en.wikipedia.org/wiki/Scale-
free_network](https://en.wikipedia.org/wiki/Scale-free_network) [2]
[https://en.wikipedia.org/wiki/Preferential_attachment](https://en.wikipedia.org/wiki/Preferential_attachment)
[3]
[https://en.wikipedia.org/wiki/Fitness_model_(network_theory)](https://en.wikipedia.org/wiki/Fitness_model_\(network_theory\))
[4] [https://www.quora.com/What-is-the-most-effective-yet-
efficie...](https://www.quora.com/What-is-the-most-effective-yet-efficient-
way-to-get-rich-2)

~~~
retube
> as I am no 1%er ;).

If you are usual HN demographic I can guarantee you actually are. 32k/year is
all it takes: [http://www.investopedia.com/articles/personal-
finance/050615...](http://www.investopedia.com/articles/personal-
finance/050615/are-you-top-one-percent-world.asp)

~~~
Phlarp
While it's always important to keep this in mind at the global scale, most
Americans use "1%" colloquially to describe the top 1% of United States
citizens.

I suspect the downvotes are from people who assume you are intentionally
misunderstanding the parent

~~~
retube
No sure I get it. It seems people don't like being reminded that whilst
they're very keen for people richer than them to share their wealth, they're
generally very reticent to share their own wealth with people poorer than they
are.

~~~
diminoten
I just thought your comment was off-topic, is all. The comment you replied to,
and all of the comments before it, were referring to the American 1%er, not
the global 1%.

However, I like to think of a downvote is paperwork, not an insult. It's a
great point, I just think the conversation flows better without it.

------
valuearb
This article basically repeats old economic saws of dubious validity. The
counter argument is Warren Buffett. Last I looked at it (going back to his
Buffett Partnership days), he beat the market every year but one for his first
30 or 40 years. Even better, he was beating the market by an average of 20% a
year during his partnership days, and something like 10% a year during his
first 20 years running Berkshire Hathaway.

It's not only statistically impossible for Buffett to be a fluke, it's
statistically impossible for him not to possess a a skill providing a
substantial edge in market investing. Not a "1% a year" type skill.

Nowadays and for the last 20 years or so, Buffett has been managing hundreds
of billions of dollars. The immense size of his portfolio restricts his
opportunities to a far smaller pool of potential investments and his edge over
the market has clearly declined because of that restriction. But he's still
beating the market the vast majority of the time.

~~~
jondubois
There are plenty of people who disagree about Buffet - Nassim Taleb who wrote
"Fooled by Randomness" is among of those. Out of all the people who started
investing in stocks in the 50s, it's not surprising that at least one of them
turned out to be among the richest people in the world and kept getting it
right every year.

If you have enough people throwing coins, you're going to get some people who
keep getting heads over and over. Those few people who have a superior coin-
tossing technique are probably not going to end up anywhere near the top -
This is especially true if you believe in the rhetoric that people of high
talent are "very rare".

The sheer masses acting out of randomness will always beat out the few "very
talented" individuals.

In "Fooled by Randomness", the author alludes to the idea that the top people
at any given time in any given field often got there through very little
talent - It just happens that their approach was a good fit for their field at
that particular time - As soon as some "black swan" event happens (and they
always happen, eventually); these people tend to lose everything very, very
quickly.

Also, the reason why Buffet gets it right most of the time these days is the
same reason why George Soros gets it right most of the time; whenever either
of these famous investors buys any stock, it becomes big news then all these
other wealthy investors follow suit - Soon enough you have half of humanity
rooting for/against that specific company/security so anything they do becomes
a self-fulfilling prophecy.

~~~
dsacco
That coin flipping analogy is not comparable to active trading. I'm going to
paste a comment I made on this topic less than a month ago:
[https://news.ycombinator.com/item?id=13303395](https://news.ycombinator.com/item?id=13303395)

In addition to the comment pasted below, others in this thread have shown that
the actual odds of someone consistently beating the market for decades becomes
1 in billions or even trillions. Yes, there are very few traders and funds
that consistently beat the market, but there are enough that it seems
implausible to be due to chance when you do any reasonable math. You would
need nearly the entire human population trying and failing at beating the
market in order to justify the number of demonstrable winners we can observe
as mere chance. It's much simpler to assume that 1) market inefficiencies
exist and 2) some individuals have the technical skill, domain knowledge
and/or business acumen to repeatedly capitalize on them.

I don't understand why this coin flipping analogy from efficient market
hypothesis keeps popping up. We can clearly see that funds like RenTec exist,
and average 70% returns year over year for literally _decades._ It's an
attractive idea, but I've never seen anyone who puts it forward do any
empirical calculation. The claim is essentially, "Get enough monkeys slinging
poop in a room full of typewriters and you'll eventually get Hamlet." If you
want to cast doubt on the fundamental possibility of people beating the
market, at least least try to claim that these successful funds/traders
illegally trade on insider information. Don't use the same analogy that is
basically indefensible under real scrutiny.

 _Comment below:_

__________________________

Yes, that's the classical coin flipping example from the strong position on
Fama's Efficient Market Hypothesis. There are several problems with the coin-
flipping analogy:

1\. As stated, it's not falsifiable. So you start with a conception of the
market as entirely random, and you observe that participants are consistently
beating this market. Each time you observe someone beating the market, you
chalk it up to the probability distribution. "Well, that's just a two-sigma
event." Then you see it happen again. "Well, that's just a three-sigma event."
Then again, and again, and again. How many sigmas from the average market
performance are you willing to accept before you agree that someone is
legitimately and purposely beating the market with a skill-based mechanism,
not a chance-based mechanism? Furthermore, do you have the numbers to turn
this into a falsifiable claim? What is your time interval? Daily, weekly,
monthly or annually? How many correct forecasts do they have to make ("how
many sigmas from the average"), compared to the chance expectation of coin
flipping over the same timescale? If you don't have these numbers handy, then
it's purely a thought experiment. Subsequently, the observation that funds
like Berkshire Hathaway, Bridgewater, Renaissance Technologies, Baupost Group,
Citadel, DE Shaw, etc. consistently beat the market for at least 20% net of
fees over 20-30 years suggests that, per Occam's Razor, people can beat the
market due to skill.

2\. The analogy is not comparable to active trading. You don't need to hit 20
heads in a row to beat the market consistently, you just need to hit a p-value
number of x heads correct for y coin flips greater than chance would suggest.
We don't assume that basketball is a game of chance if the players can't make
all their shots in a row; nor do we assume that baseball players with a 0.3
batting average aren't clearly better than the average high school dugout. If
your trading interval is weekly or monthly, and you're consistently up over
the market (even net of fees!) for 240 months or 360 months, it doesn't matter
if every single month was a winner.

3\. Have you ever read Warren Buffet's response to the EMH assertion, as
postulated by Fama?[1] He outlined an excellent rebuttal in his 1984 The
Superinvestors of Graham and Doddsville. Essentially, if you assume that the
coin flipping analogy does map to trading, then you should expect to see a
normal distribution of the winners, given that the market is inherently random
and no one is achieving superior coin flips through skill. However, if you
observe that the winning coin-flippers consistently hail from a small village
with standard coin-flipping training, then it is more reasonable to assume
that there is something unique about those particular flippers. This is what
we see in reality - yes, most amateur traders fail miserably, and yes, most
hedge funds underperform the market over time. But there is a relatively small
concentration of extremely successful funds and traders in an uneven
distribution.

4\. Even Fama has walked back on Efficient Market Hypothesis, and no longer
espouses the view that the market is inherently random. It is deeply complex,
yes, but it is not efficient, nor entirely random. Several studies have been
conducted to empirically examine EMH, and the results in favor of the
hypothesis are dubious.[2][3][4] A much more charitable retelling of EMH is
the weak position, which essentially states that any obvious alpha will be
quickly arb'd out of real utility, but that non-obvious alpha, or alpha which
is technically public but not easily accessible will retain utility until it
becomes obvious. This also maps more cleanly to reality, in which trading on
e.g. news reports is mostly unprofitable (everyone can get a news report at
around the same time, for the same level of skill) whereas mathematically
modeling pricing relationships can be extremely profitable (doing so
accurately requires public, but mostly unclean data and a great deal of
skill). _______________________________________ 1\. The Superinvestors of
Graham and Doddsville -
[http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984....](http://www8.gsb.columbia.edu/rtfiles/cbs/hermes/Buffett1984...).
2\. Investment Performance of Common Stocks in Relation to Their Price-Earning
Ratios: A Test of the Efficient Market Hypothesis -
[http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1977....](http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1977...).
3\. The Cross-Section of Expected Stock Returns -
[http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1992....](http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.1992...).
4\. International Stock Market Efficiency and Integration: A Study of 18
Nations -
[http://onlinelibrary.wiley.com/doi/10.1111/1468-5957.00134/a...](http://onlinelibrary.wiley.com/doi/10.1111/1468-5957.00134/a..).

~~~
forrestthewoods
One in billions is not impossibly rare when there are over 7 billion humans
alive.

~~~
dsacco
The ratios for these calculations only include _participants._ There are seven
billion humans, the vast majority of whom are either not old enough to trade
or not in regions where they can actually participate in trading (in the
speculative, not investing sense). Of those even eligible to trade, most do
not engage in it in any kind of intentional capacity, let alone professional.

There are _not_ seven billion traders. At any time in the United States the
number of funds is in the thousands. Adding in other countries, and being
generous with the term "trader" (or "investor", "fund manager", etc), I would
be willing to agree that there have been millions over the past two decades
(the same time frame as some of the track records I've mentioned). What does
that leave us with? We're still orders of magnitude away from the successes we
observe emerging due to chance. The numbers just aren't there.

~~~
rhizome
I'm not a stats or even econ nerd, but could the numbers shake out if you
counted all of the participants since the market was created?

~~~
dsacco
Hm...theoretically? The thing is, the broad zeitgeist of extremely profitable
strategies changes over time. James Simons and Warren Buffett might as well be
in different fields for how different their day to day work and peripheral
market behavior were during their careers. That might be confounding, because
on a long enough timeline all job functions become obsolete and have to
change.

Other than that though, sure. Unfortunately it would be really difficult to
examine empirically, which is why I use a 20-30 year slice of time.

------
Applejinx
"How big can this “talent differential” be and still stay statistically
consistent with the power law wealth distribution we see in the real world?

It turns out that it can’t be more than about 1 percent.2 A larger talent
differential would produce a wealth distribution that is even more extreme
than the real one, and that would not follow a power law."

I thought this article looked like it was going to be very obvious, but that
passage got my attention. I'm all for experiments of this nature: one day AI
will be doing it as a matter of course, on a massive scale.

Lines up with my observation, too: talent makes a difference, and it's about
1% over time. Kind of like compound interest. You can win out if you're very
persistent and very determined and you fail a lot, because you're shooting for
that 'luck' moment. There's no telling where it will strike, because it's
luck! You have to stay in there and not go broke because it's luck, there's
very little correlation between merit and success.

I suspect if you went by tenacity rather than 'talent', the number might be a
lot more than 1%. But bozos can be tenacious too, which is a daunting thing to
consider.

~~~
sametmax
And it's why you see successful bozos as well.

------
ImTalking
> We all know stories of ambitious and talented people like Steve Jobs or Bill
> Gates, who grew companies and created great wealth.

True. Yet both were extremely lucky at the beginning. We all know the story
but Gates' mother knew IBM President John Opel, his father was a prominent
contract lawyer, and IBM originally wanted CP/M but Gary Kindall missed the
meeting to fly his plane. And Microsoft retaining the rights to the OS was, in
hindsight, a very grave mistake.

Jobs had the charisma and drive, but without Woz I'm sure we wouldn't be
talking now about Apple.

But given the opportunity that this initial luck gave them, they absolutely
maximised it, so good on them.

~~~
charlesdm
But they could've still made something of themselves, even if that opportunity
didn't pan out? They might not have become billionaires, but I don't think
it's unrealistic to assume both would've done well in life.

------
ikeboy
>If the ratio of 50,000 were to hold for other traits, it would imply
individuals who are 53 miles tall, have IQs of 5 million points, and live to
be 4 million years old.

That's just not how to do statistics, sorry. First of all, one of those is not
like the others: IQ is normalized, the others are not. There are so many
assumptions about linearity and distributions here that would need to be a lot
more rigorous before anything like this could be said.

See
[http://www.thedailybeast.com/articles/2013/02/06/department-...](http://www.thedailybeast.com/articles/2013/02/06/department-
of-awful-statistics-income-inequality-edition.html) for an actual interesting
point regarding income and bell curves.

~~~
dhfhduk
IQ is normalized, but that doesn't change the shape of the distribution. It
changes the scale, but not the shape.

I agree there's a lot of details that need to be done to make this more
rigorous, and I was hoping that the article would be more thorough.

But this has been on my mind a lot lately.

Basically, most human [behavioral] traits are normally distributed, or
something close to it, which is radically different from income distributions.
At some point, the shape of an income distribution must become inconsistent
with what we know about the shape of human trait distributions and wages under
fair labor markets, etc. It should be possible to test whether or not an
income distribution is consistent with a given trait and market model, and to
compare them statistically.

I appreciate McCardle's writing, and read that in the past, but think it's
sort of tangential to the points being raised here. Furthermore, many of her
arguments aren't supported by the data. That is, income inequality really
exists across a wide range of professions. If anything, I suspect there's some
demographic effects involved (for example, older, very well-established
individuals with a "lock" in a given labor market, shutting out younger
individuals).

They also don't even get into cheating as another factor that's nonrandom and
might be construed as a "skill" but is arguably unrelated to "real" market
value.

All of this is consistent with arguments that the biggest predictor of returns
is length in the market. That is, you're better off putting things in a very
diversified index portfolio than anything else.

Someone else mentioned Buffet. Even if things were random, with enough people,
you'd still end up with people who look like they're not benefiting randomly.

Anyway, I'm not really trying to question Buffet's investing skill. I'm sure
that it's not totally random, but I suspect that there is a big element of
randomness also. And income per se is different from investment skill per se.

~~~
ikeboy
>IQ is normalized, but that doesn't change the shape of the distribution. It
changes the scale, but not the shape.

It means talking about an IQ of 5 million as somehow analogous to linear
extrapolations of height or age means the author has no clue what they're
talking about. The only way to have an IQ that high is to have a population
large enough for it to be meaningful, while the other example _are_ possible
statistically (if not physically).

Anyway, having now read through the rest of the article, my critique is much
simpler: they're using a simplified model with specific magic constants, and
using it to derive exact values for other unknowns (specifically talent).

>Half the time it will come up heads and yield a return of 30 percent, and on
the rest of the tosses it will come up tails and yield a loss of 10 percent.
The numbers are chosen to give an average annual return of 10 percent, plus or
minus 20 percent, which is typical of investments in the real stock market,
but the overall conclusions do not depend on these specific numbers.

But then they say

>How big can this “talent differential” be and still stay statistically
consistent with the power law wealth distribution we see in the real world?

>It turns out that it can’t be more than about 1 percent.

I haven't dug into the numbers here, but I'm comfortable discounting their
conclusion because of the clear signs of unfamiliarity with concepts
mentioned, as above. Also, they seem to be assuming that most of these people
made their money investing, but that's unrealistic, yet they cite articles
about money managers. It may very well be that money managers perform
randomly, but that clearly shouldn't extrapolate to other rich people. The
whole model is incorrect, people get rich by doing many other things (start a
business, invent a product, etc) many (most?) of which are, in fact, related
to talent but are completely missed by the model.

They casually throw out the claim that "They cannot possibly be the whole
story at the high end, where people’s wealth is primarily determined by
capital gains or losses on investments." but with no citation, and, as above,
I doubt that. (A quick search turns of up
[http://www.forbes.com/sites/erincarlyle/2013/09/18/how-
self-...](http://www.forbes.com/sites/erincarlyle/2013/09/18/how-self-made-
forbes-400-billionaires-earned-their-money/) which says investing is plurality
but not a majority of the top 400's sources of wealth).

They keep on going back to people like Gates and Jobs, further confusing the
question.

------
jacques_chester
Even the Steve Jobs example of a super-talented individual relies on luck.

In the universe where he didn't meet Steve Wozniak, Steve Jobs was probably
consistently in the top 3 Mercedes salesmen in California.

Not to mention: merely being born in a wealthy country during a period of
relative peace is so much luckier than the lot of humans throughout history
that it is almost worthy of bad science fiction.

~~~
fleitz
Which would be true if wealthy countries in times of peace were randomly
distributed rather than being as a result of culture

~~~
coliveira
Wealthy countries are not randomly distributed, but where you are born is
randomly distributed, with a bias to the poor side.

~~~
jpttsn
You're born in close proximity to your mother. The veil of ignorance is a
mental model; in reality, there is no lottery stork that places children
randomly.

------
sgustard
The richest eight people now have the same wealth as the poorest 50 percent.
Most of that wealth comes from investing (rather than labor). There is no
probability model that would lead to this result; eventually someone on a "hot
streak" is bound to lose.

What we're seeing is that luck may give some random people a boost at first,
but that boost is sufficient to let them take all the winnings over time. The
rich get richer. Investing success and wealth building follow a Darwinian
rather than a probabilistic model.

~~~
harmegido
Gates, slim, Ellison, the Kochs, and the Waltons were all in the top eight
from a quick search I did. None of those gained the majority of their wealth
through investing.

~~~
ci5er
Buffet and Carlos Slim did, did they not? After starting out in trading (for
~30 years, no?), Carlos Slim got bigger with Telmex (while I don't know how
much collusion was involved with that; I assume it couldn't have been none,
which probably isn't fair of me) before going large with investing again...

The rest of the list includes Ingvar Kamprad, Bezos, Zuckerberg and Amancia
Ortega, and none of them gained the majority of their wealth through
inheritance or investment either. Now, their kids on the other hand... :-)

------
atemerev
This article deliberately confuses normal distribution, which applies to such
things as height or IQ, and power law distribution, which applies to wealth,
social connections, city sizes etc.

I think nobody is surprised about the fact that the largest cities are more
than million times larger than the smallest settlements. Or that that top 1%
of the largest cities includes the sizable proportion of human population.

------
acd
There is a book where monkey throws darts at a dartboard beats professional
investors. There is also a similar where cats pick stocks with their whiskers
and beats the pros.

A Random Walk down Wall Street
[http://www.forbes.com/sites/rickferri/2012/12/20/any-
monkey-...](http://www.forbes.com/sites/rickferri/2012/12/20/any-monkey-can-
beat-the-market/#1a7d51bb6e8b) [http://www.marketriders.com/investing/why-
googles-investment...](http://www.marketriders.com/investing/why-googles-
investment-advice-is-good-for-all/)

------
MR4D
Interesting article, but like many things I've read on this topic, it still
focuses on the "cause" being luck. I'm not so sure that's correct (not
convinced it's wrong, either, but hey...)

For instance, if I look at Zuckerberg or Gates, they had access to an amazing
network (happened to both be at Harvard). That network allowed good ideas to
explode in value. If Zuckerberg were at a community college in a poor section
of the country, I'm not sure his idea would have captured the same value.
Similarly, had Gates' mother not been on several boards, Microsoft would never
have gone anywhere (clearly the introduction to high-level IBM executives
through her board connections was paramount in his success).

I don't discount luck - I think it's very important. But luck comes about from
your surroundings, and having access to a network like these two had will tilt
the luck in your favor much more than if you have a weak network.

If economists focus on the networks, they will have better solutions to
addressing inequality.

One final note - I don't think inequality is necessarily bad - rather, it is
the inability to move up (or not evening having the chance to move up) that is
the real problem.

------
snarf21
Although I completely agree that luck is a major factor, the author loses me
when he takes his hypothetical "lucky people get 30% gain, unlucky people get
10% loss" and builds on top of that as if it was a provable fact. It is okay
to use this as a mechanism to illustrate that this matches the power law
distribution that we see in reality. This part makes sense as an intellectual
exercise.

Applying 1% on top of that as talent and rerunning it, stayed within power law
distribution but making talent larger would break it. The faulty logic to me
is what makes the "lucky 30% gain, unlucky 10% loss" fact? It seems much more
likely that there is an 8% base (index funds, e.g.) with luck playing a +-10%
and talent being another ~7% (as a hypothesis). Also, remember his "game" to
prove luck > talent only ran for 20 years. I'm curious if I plugged this into
a spreadsheet and ran for 50 years if I couldn't get the same power law
distribution with greatly different factors. Mainly, it requires a lot of luck
_AND_ talent.

------
erikb
Do the rich really keep getting richer? I would assume that as you have more
money you don't just have more opportunity but also more competition. There
are lots of people who try to take your money one way or another without any
return.

~~~
mixmax
>Do the rich really keep getting richer?

Yes, that's basically the findings of Thomas Pikkety. His tome "Capital in the
21st century" goes through great lengths to find and explain the numbers
behind the finding.

~~~
erikb
Done now with Pikkety. Well, he summarizes it very simplified. I think his
model doesn't necessarily mean that the person who was rich 10 years ago is
richer now. It still works out if for example each year a start-up of the same
size has a 5% bigger exit than the year before, but 10 years later the founder
of the first exist is broke and homeless already. What I mean is it doesn't,
afaik, consider fluctuation in each group. Also many economists criticise that
money is only measurment of wealth, and some are quite hard to represent in $.

------
edblarney
This article represents a disingenuous premise.

It's also grossly mis-titiled.

'Wealth' is mostly not generated by speculative investing.

And yes - most 'investing' is luck, but investors already know that.

But declare that some kid who worked his pants off through school, got into a
half-decent Uni, and went on to get a high paying job - to his brother, who
didn't do much in school, and took a job at their fathers auto-shop earning a
respectable but relatively small salary - in terms of 'luck' is just unfair.

------
mack1001
Among the 1% there exists multiple deep and consistent insider networks where
stock tips and wealth creation ideas are exchanged. So the 1% crowd thrives
from being in that position.

~~~
estefan
I doubt the top 1% got rich by insider trading.

~~~
edblarney
"I doubt the top 1% got rich by insider trading."

First - there is tons of 'insider trading' going on. It's easy to do, and hard
to prove.

Second - though maybe not 'insider' in the illegal sense - but once you have a
lot of wealth, you have access to information and systems that others do not.

Warren Buffet made huge bank of a loan to Goldman during the crises. He was
one of the few to have the cash and the reputation. Buffet can take advantage
of so many situations that very few others can. So that's a lot of leverage.

I'm not saying anything against them, but big finance is an 'insiders game'.

------
leed25d
People have been bullshitting us for centuries that market investing is a game
of skill. If it really comes down to luck then it is gambling, and it should
be treated (legally) as such.

~~~
charlesdm
Right. And because of luck you always have the same poker players winning at
tournaments, taking home the cash?

I personally don't believe investing in the market is gambling, but even if it
were, that doesn't necessarily mean you can't consistently make money from it.
Some of it is luck, some of it skill.

Investing in general is about probability. An example: I am working on a deal
right now.

If it goes through I put $100k at risk by investing in an asset. Absolute
worst case I can resell that asset for $50k, but I can probably sell it on for
$100k. Best case if everything pans out I make $3m. The chance of that
happening is probably around 50%. Those are odds I like. Lots of upside,
almost no downside. Some publicly traded stocks are like that.

~~~
drumdance
Well, some argue that poker is a game of skill. Bluffing, looking for tells
etc. Everything I've read is that when you get to the championship level,
everyone already is good at understanding probabilities. It's psychology that
makes the difference.

In fact, just last night I talked to a woman who does really well at poker
because she randomly pretends to be a "dumb broad" on some hands.

------
DeBraid
One of the best 'Talks at Google' via Michael Mauboussin "The Success
Equation: Untangling Skill and Luck"

Thesis: where absolute talent/skill is high, variance in relative talent is
low, thus luck > skill.

[https://www.youtube.com/watch?v=1JLfqBsX5Lc](https://www.youtube.com/watch?v=1JLfqBsX5Lc)

------
myf01d
It certainly needs considerable amount of luck to earn the first big $ on your
investments, but you should be ruthless, sociopath, cold blooded, patient and
hard-working to continue growing & become like Icahn or Buffet.

~~~
Zigurd
The cold-bloodedness just helps justify oneself. It won't change outcomes.

------
cies
Maybe "insider trading" is often rebranded as "luck".

------
amelius
At least with investing you can spread your risk. In contrast, if you are a
programmer at a startup, you typically have all your eggs in one basket. In
other words, more talent than luck.

------
ariwilson
If you can't optimize for talent, you should optimize for costs. Investing in
low cost passive index funds is best for most people's low risk plans
(retirement, house, etc).

------
paulus_magnus2
Dubious article relying on Gell-Mann Amnesia.

We'd easily spot the fallacy if it read "engineering correct software Is More
Luck Than Talent"

------
readhn
There is no investment. There is only speculation. Speculation that the asset
price will increase. Speculation that your purchase will return higher value
in the future. In order to be successful at speculation you do have to have
certain talents and character traits. Study most successful speculators of or
times and you will see certain patterns and common traits.

~~~
valuearb
Speculation is the purchase of investments where you don't have a clear idea
of the value of the investment, and are gambling on the direction of the
market price.

Actual investment is usually called "value investing", you purchase assets at
a substantial discount to their intrinsic value and wait for the market to
recognize that value. True value investing is rarely practiced on Wall Street
because Wall Street is mostly about the latest fad and charging fat fees to
the uninformed. And when Wall Street firms tout themselves as "Value" they are
typically just buying low PE stocks, which isn't actual value investing at
all.

~~~
senthil_rajasek
You should quote your sources. These are ideas from Ben Graham.

~~~
jabgrabdthrow
You have to quote your sources for the concept of "value investing"? Did I
miss a joke?

~~~
senthil_rajasek
"value investing" gets thrown around a lot without proper attribution. It's a
very specific investment style proposed by Ben Graham. The reason why I like
attribution is a) I know that it's the specific thing being talked about b) It
gives credit to the originator of the ideas ( especially in the investing
circles) since investing is an area where a lot of charlatans like to take
advantage of gullible people by looking smart.

------
deepnotderp
Don't firms like Renaissance and Virtu destroy this notion?

~~~
physguy1123
I assume you're referring to the Virtu statement that they only lost money on
one day?

That's true (or nearly true) of good HFT shops in general. The type of trading
that HFTs do (market making, short term predictions) is generally less risky
than long term investments. Also, the risk/reward of this trading is realized
over minutes, not over weeks/years. So just as a hedge fund might have an
unprofitable week but a good year, an HFT has a bad 20 minutes but over the
whole day comes out on top.

For Renaissance, maybe they are truly smarter than the rest of the market or
at least able to act on good trades before anyone else. I wouldn't discount
foul play though.

~~~
deepnotderp
I'd really be interested to know about the foul play angle, but firms like
these buy drone and satellite data, surely they have some information
advantage?

~~~
physguy1123
Well, the thing is that other extremely good firms buy drone and satellite
data, and other firms also pay the top rate to extremely good people, and etc.

So either RenTech is somehow consistently wildly smarter than the rest of the
industry through some completely unknown secret, or something else is up. They
might be using insider information, they might have a deal with someone news
firms* to get news early, they might use illegal order execution techniques.
There's a whole slew of things they might be doing to get an advantage. Maybe
they use funds other than Medallion (the super good one) as a testbed for
strategies and deploy the really good ones to their best fund. FWIW, I don't
think funds started by anybody who left there are as successful so the secrets
aren't leaving.

* A friend of mine in the hft industry told an interesting story to me. A high-speed news wire was very predictive of when orders relevant to the news would get run over - except backwards in time. The news was consistently a few minutes late. So either the high-speed news wire was laughably worse than the competition or somebody was getting news early through illicit means.

------
m3kw9
Luck is when preparation meets opportunity.

------
known
"I'm a great believer in luck, and I find the harder I work the more I have of
it" \--Thomas Jefferson

------
cs702
Here's Warren Buffett's response, published on May 17, 1984[1]:

"I would like you to imagine a national coin-flipping contest. Let’s assume we
get 225 million Americans up tomorrow morning and we ask them all to wager a
dollar. They go out in the morning at sunrise, and they all call the flip of a
coin. If they call correctly, they win a dollar from those who called wrong.
Each day the losers drop out, and on the subsequent day the stakes build as
all previous winnings are put on the line. After ten flips on ten mornings,
there will be approximately 220,000 people in the United States who have
correctly called ten flips in a row. They each will have won a little over
$1,000.

Now this group will probably start getting a little puffed up about this,
human nature being what it is. They may try to be modest, but at cocktail
parties they will occasionally admit to attractive members of the opposite sex
what their technique is, and what marvelous insights they bring to the field
of flipping.

Assuming that the winners are getting the appropriate rewards from the losers,
in another ten days we will have 215 people who have successfully called their
coin flips 20 times in a row and who, by this exercise, each have turned one
dollar into a little over $1 million. $225 million would have been lost, $225
million would have been won.

By then, this group will really lose their heads. They will probably write
books on “How I turned a Dollar into a Million in Twenty Days Working Thirty
Seconds a Morning.” Worse yet, they’ll probably start jetting around the
country attending seminars on efficient coin-flipping and tackling skeptical
professors with, “If it can’t be done, why are there 215 of us?”

By then some business school professor will probably be rude enough to bring
up the fact that if 225 million orangutans had engaged in a similar exercise,
the results would be much the same — 215 egotistical orangutans with 20
straight winning flips.

I would argue, however, that there are some important differences in the
examples I am going to present. For one thing, if (a) you had taken 225
million orangutans distributed roughly as the U.S. population is; if (b) 215
winners were left after 20 days; and if (c) you found that 40 came from a
particular zoo in Omaha, you would be pretty sure you were on to something. So
you would probably go out and ask the zookeeper about what he’s feeding them,
whether they had special exercises, what books they read, and who knows what
else. That is, if you found any really extraordinary concentrations of
success, you might want to see if you could identify concentrations of unusual
characteristics that might be causal factors.

Scientific inquiry naturally follows such a pattern. If you were trying to
analyze possible causes of a rare type of cancer — with, say, 1,500 cases a
year in the United States — and you found that 400 of them occurred in some
little mining town in Montana, you would get very interested in the water
there, or the occupation of those afflicted, or other variables. You know it’s
not random chance that 400 come from a small area. You would not necessarily
know the causal factors, but you would know where to search.

I submit to you that there are ways of defining an origin other than
geography. In addition to geographical origins, there can be what I call an
intellectual origin. I think you will find that a disproportionate number of
successful coin-flippers in the investment world came from a very small
intellectual village that could be called Graham-and-Doddsville. A
concentration of winners that simply cannot be explained by chance can be
traced to this particular intellectual village."

[1] [https://www8.gsb.columbia.edu/articles/columbia-
business/sup...](https://www8.gsb.columbia.edu/articles/columbia-
business/superinvestors)

------
hvd
great way to tell the masses and countless business school grads that its not
even worth trying. Any astute investor will support articles like this since
it reduces competition. Thinking is bad. Long live index funds.

------
Bud
Pretty funny that this apparently got flagged. Perhaps a couple entitled
investors didn't like this particular message.

------
imaginenore
That's demonstrably false. How would you explain quants? All the financial
firms that exist solely because of how good they are at buying and selling
securities?

------
ry4n413
Says the professor who has never worked in the investment industry.

------
FullMtlAlcoholc
If your takeaway from this is most, if not all, investment is pure
speculation, you are either very naive or willfully ignorant.

I'm nit saying talent per se is a signifixant factor, but this view suffers
frim the sane nakady that a lot if wconomic theories do... an idealized
situation/world where everyone plays by the rules. To some individuals, life
is not a game, but a winner take all conflict and they will Kobayashi Maru the
situation whille others are still playing a game of chance

------
downandout
In the short term, investing may indeed be more luck than talent, however this
article strives to imply that market-beating results are essentially pure
luck, which simply isn't the case over time. Over time, the best investors
will always wind up with market-beating returns, and the worst investors will
always wind up with market-trailing returns. Like any game with significant
short-term variance, those with the greatest skill might not be readily
apparent from a small sample size of results - I might beat Phil Ivey for a
day or even a month at a poker table. But if we play long enough, I literally
have no chance of being ahead of him. The same holds true for investors.

Articles like this seem like a cop-out for failed investors, and perhaps an
argument for using index funds. If it's all luck, then your own failings
aren't your fault. But that view doesn't apply to most areas of life,
including and perhaps especially when it comes to investing decisions.

~~~
matt4077
You're just asserting, i. e. "which simply isn't the case over time". The
article build a model that appears reasonable, and from which follows that any
talent allowing returns above 1% of the market would lead to a wealth
distribution different from the one observed in reality.

~~~
downandout
Since you don't like my comment, if you read some of the other comments in
this thread, you'll see that the model built in this article actually isn't
reasonable at all (as I said). A small percentage of investors have achieved
results that aren't possible through pure luck. So you are, in a word, wrong.
Thanks for the downvote though.

