Today's Thought on Investments

 Investing for Survival

            12 things I learned from Morgan Housel: Part 9

9. “It can be difficult to tell the difference between luck and skill in investing.”

Investing involves both skill and luck. Sorting out how much of a given result is skill versus luck is neither easy or always possible. The very best books on this topic have been written by Michael Mauboussin, including The Success Equation. Howard Marks also has useful view on the difference between luck and skill and investing: “Success in investing has two aspects. The first is skill, which requires you to be technically proficient. Technical skills include the ability to find mispriced securities (based on capabilities in modeling, financial statement analysis, competitive strategy analysis, and valuation all while sidestepping behavioral biases) and a good framework for portfolio construction. The second aspect is the game in which you choose to compete. You want to find games where your skill is better than the other players. Your absolute skill is not what matters; it’s your relative skill.” Warren Buffet describes the object of the process simply: “Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we’re trying to do. It’s imperfect but that’s what it’s all about.”