Luck is a factor for any speculative venture. I remember “Paul the Psychic Octopus” had a perfect record for picking the winners of 8 successive World Cup soccer matches.
Beyond sports, investment is sometimes regarded as a speculative venture prone to random chance. We have read, with amusement, the reports that an ordinary house cat has done a better job at picking stocks than a paid financial advisor.
Read the full article here.
These results should not be a surprise to any investor. This is not a judgment of this particular financial advisory team and their skill (or deficiencies) for picking stocks, but rather because simple luck is a factor that frequently overwhelms any investment style. More specifically, the random walk hypothesis suggests that individual stock movements are – particularly in the short term – utterly unpredictable.
Our April 2012 article on investment manager due diligence discusses the difficulty with separating luck from skill for generating investment returns and we also suggest solutions to this problem.