The fine line between genius and blind luck

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The fine line between genius and blind luck

Сообщение HainanWel.com(e)! » 05 мар 2017, 21:36

In 2006, Fortune magazine devoted an article to Bill Miller as "one of the greatest investors of our time."

His $ 20 billion investment fund in the US, over 15 consecutive years, outperformed the S & P 500, a success that no one has yet been able to achieve.

Unfortunately for everyone who invested in Miller's fund in 2006, his fund lost more than 30% over the next 5 years. During this period, Morningstar analysts rated Miller's fund at the latest 1,187 place among similar US investment funds, whose activities they monitored.

What happened? Did Miller change his investment strategy in 2006? No. For profitable years, as well as for unprofitable, Miller used the same strategy, imprisoned for shares of several large companies. Perhaps Miller lost his skills or the leading analyst left the team? Or is it possible that the markets have changed in any way?

 Not this has changed. What has changed is the luck of Miller. It is possible that both his success and his failures were due to luck or his absence.

Miller's story demonstrates the immutable truth of investing: distinguishing luck from talent or bad luck from unprofessionalism is extremely difficult.

Each year, the management funds that received the maximum profit and attracted the largest number of clients due to their successes, are extolled to the skies. Managers who manage to be 10 or even 15 years better than competitors get the highest praise and are called investment geniuses.

 The main idea is that even if the managers do not have special talents and their activity was completely disorderly, even after 10 and after 15 years there will still be a small number of those who differ in phenomenal successes. This can not happen according to the laws of statistics.

 Thus, even if the selected investment managers have rare talents that have led them to brilliant results, it is impossible to distinguish talented ones from lucky ones by analyzing their profitability.

 As a consequence of accepting luck for talent, the players on the stock exchange believe that being a successful investor is easy. The stories of mega-successful investors, even if they are a minority, overshadow us with common sense. We believe that we, too, will be successful - they also succeeded.

 The tendency to base decisions on the observed success, while ignoring unnoticed failures, is called the "systematic error of the survivor." This phenomenon is used in lotteries - buyers of the lottery ticket are motivated by stories about the few lucky ones who broke the jackpot. Millions who bought tickets that never win, go unnoticed.

Also stories about successful trading create the impression that trading will help you get rich quick. No losing trader has his own site, which details his failures. Perhaps they also had great plans, they also traded aggressively and hoped for greater profits. But they were not lucky. Just these many losers are not around to tell their stories, in any case, hardly anyone would want to listen to them. What inspires us is stories and a few survivors in the fight against the market.

The world of exchange trade, like any other field of activity, generates many stories of success and failure. In human nature, one wants to imitate the successful. Nevertheless, the truth is that, recognizing success without taking into account such a component as luck is the direct way to defeat.
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