This concept of process versus outcome was first introduced to me when I read the book, “More Than You Know”, by Michael Mauboussin. It was also discussed in the books written by the brilliant authors Michael Covel and Mark Douglas.
The best way to explain the concept is using the following examples, which involves the game black jack (the only card game I know).
1) Good Process/Good Outcome
The cards you are dealt add up to 12. You have the choice to stay or hit. You chose to hit and receive a 9-blackjack.
The equivalent scenario, in my view, in the stock market is that you see a stock in a downtrend, so, following your rules, you short it. The stock ends up falling another 40% before turning around.
2) Good Process/Bad Outcome
The cards you are dealt add up to 12. You have the choice to stay or hit. You chose to hit and you get a 10 -bust.
In the stock market this is comparable to buying a stock that is in an uptrend, (more…)
Archives of “michael mauboussin” tag
rssMichael Mauboussin: New Book
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Michael Mauboussin talks about The Success Equation: Untangling Skill and Luck in Business, Sports and Investing -video
Skill Vs Luck
Michael Mauboussin, head of Global Financial Strategies at Credit Suisse, has written extensively on the role of skill vs. luck in many endeavors … mostly for business, sports and investing.
He is well worth paying attention to.
This, in particular:
There is actually a very interesting test to determine if there is any skill in an activity, and that is to ask if you can lose on purpose. If you can lose on purpose, then there is some sort of skill. Investing is very interesting because it is difficult to build a portfolio that does a lot better than the benchmark. But it is also actually very hard, given the parameters, to build a portfolio that does a lot worse than the benchmark. What that tells you is that investing is pretty far over to the luck side of the continuum. That is the first important thing.
From that one paragraph, and the logical conclusions that follow (there is a lot more to it than that one paragraph) … a few important points:
- There is a continuum of luck to skill
- Investing (I’d substitute ‘trading’ in there) has elements of both … “pretty far over to the luck side of the continuum“
- Given it’s a spectrum, there is skill involved
- Skill can be improved
Was Benjamin Graham Skillful or Lucky?
Last weekend’s Intelligent Investor column looked at the extreme difficulties of disentangling skill from luck when you are evaluating investment performance. It’s the topic of an excellent new book by Michael Mauboussin and a subject of endless fascination – and frustration – to investors.
We tend to think of the greatest investors – say, Peter Lynch, George Soros, John Templeton, Warren Buffett, Benjamin Graham – as being mostly or entirely skillful.
Graham, of course, was the founder of security analysis as a profession, Buffett’s professor and first boss, and the author of the classic book The Intelligent Investor. He is universally regarded as one of the best investors of the 20th century.
But Graham, who outperformed the stock market by an annual average of at least 2.5 percentage points for more than two decades, coyly admitted that much of his remarkable track record may have been due to luck.
In the Postscript chapter of The Intelligent Investor, Graham described “two partners” of an investment firm who put roughly 20% of the assets they managed into a single stock – a highly unusual departure for the conservative managers, who normally diversified widely and seldom invested more than 5% or so in any one holding. (more…)