Count on your strategies, not stars
by Vivek Kaul/ DNA Money
My father will sit down and give you theories to explain why he does this or that. But I remember seeing it as a kid and thinking, Jesus Christ, at least half of this is bullshit. I mean, you know the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reasons.
— Robert Soros on his famous father, George Soros
Kunal Bajpai had just finished reading a book titled, Fooled by Randomness, The Hidden Role of Chance in Life and Markets, written by Nassim Nicholas Taleb.
All the famous investors of the world, be it Warren Buffet, Peter Lynch or George Soros were famous because they performed when others around them did not. Having just finished reading the book, Bajpai wondered how much of their performance was because of luck or chance.
Taleb, in his book, elaborates the role chance plays in investments. The argument offered by him and a few others point out the near-certainty of some analysts and fund managers about stocks doing well over a period of time, merely by chance or luck.
Let’s say there are 2,000 fund managers (or stocks or analysts). In any given year, roughly half of them are expected to outperform the market. In the first year, 1,000 fund managers will outperform the market.
In the second year, 500 fund managers will outperform the market. Iterating the same way, there will be one fund manager who outperforms the market for 11 consecutive years by chance alone.
The business media will then pick up on this and go gaga over the stupendous performance. Comments will be made about his brilliant mind, his remarkable style and why he thinks the way he thinks.
And if someone decides to write a biography of this successful fund manager, some of his childhood experiences will get related to his attributes of success.
If in the next year, the analyst is not able to beat the market, the blame game will start. People will find fault with his much-celebrated work ethics or come out with reasons, pointing out towards his changed investment style. Emphasis will be laid on how he is not following the things that made him successful anymore.
“The truth will be, however, that he simply ran out of luck,” as Taleb puts it in his book.
Since so much information is available these days, something insightful can always be said about each and every market event.
And this makes truly random happenings (like the success of the fund manager in the example taken above) in the market look as though they were triggered by some genuine factors. Indeed, individuals always attribute their success to their own qualities and their failure to lack of luck.
This again does not mean that Warren Buffet, Peter Lynch, George Soros were all plain and simply lucky with what they did.
This, obviously was not the case. However, their performance is not as successful as it’s made out to be. If someone like a Buffet decides to invest in a certain stock, his decision influences a lot of other investors in the market as well.
Before Buffet became famous, people may not have been following the investments he made, but now they do and follow his investment strategy. This obviously pulls up the price of the stock that Buffet decides to buy, thereby giving Buffet and others of his ilk more credit than what they deserve.
