What many investment managers (and investors) have yet to realize is that much of their historical investment performance is more attributable to the secular bull market of the 1980s and 1990s than to manager skill. They rode a big wave and now everyone thinks they can control the ocean.
The reality is, and many are beginning to realize this as the 2000s pan out to be an era of stock market gyrations, investment managers rely on luck a lot more than anyone thinks. One or two lucky years can filter through returns calculations for years, with investors not realizing that a manager’s ‘strong’ 10yr track record is simply because of a couple lucky years – take out those lucky years and many are left with suboptimal performance.
While there are managers out there that truly do have tons of skill it is quite difficult to distinguish them.
Michael Mauboussin examines this issue:
Untangling Skill and Luck
