New Paper from Mauboussin: Min(d)ing the Opportunity Excess Returns Require the Chance to Apply Skill

“Much of what we experience in life results from a combination of skill and luck.” —Michael J. Mauboussin, The Success Equation – Untangling Skill and Luck in Business, Sports, and Investing

A new paper is out from Mauboussin and Callahan, both currently at Credit Suisse.

Below, a sneak peak from the introduction:

The point of this report is that all of the skill in the world is for naught if you don’t have attractive opportunities. While the investment industry is focused on ways to ferret out skill, there is less discussion about where and how investors should apply their skill.

There are two basic conditions that present a challenge for skillful investors. The first is where the payoffs are potentially attractive but all of the competitors are very skillful. In this case, the skills of the players are offsetting and luck plays a large role in determining the outcome. For example, a good poker player who wants to make money should seek games with weaker players. Playing in highly competitive events may reveal prowess but is a tough way to make a living.

The second condition is when the payoffs are meager. You can be the most skillful person playing, but there’s not much to play for. Consider the draft in sports, the primary way that professional sports leagues assign amateur players to its teams. In some years the draft is rich with great players. But in other years there is a dearth of talented players. You can have the most skillful scouting and draft strategy around but your skill won’t pay off if the pool of players is poor.

Click image to download PDF. Also, the Mauboussin link post will be updated to include this one to.



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