The age old debate of whether luck or skill is more important for an investors'a success will likely never be resolved, although the attached presentation by Legg Mason's Michael Mauboussin provides some colorful anecdotes to validate the view of either side of the polemic. To be sure, working with someone like Bill Miller, Michael must be all too aware of just how prominent a role luck plays (or at least decade long leveraging into a cheap market bull run, only to see all your profits and reputation evaporate overnight when it all comes crashing down), which is precisely why his conclusion tends to veer on the side of skill. Obviously, when dealing with such concepts that have Gaussian distributions, as stocks increasingly demonstrate fractal features (courtesy of HFT), the whole debate is becoming increasingly moot. Yet Mauboussin does have an interesting discussion on reversion to the mean phenomena: something which in a world of near 1.000 implied correlation is of huge and often underestimated, significance: "We have mentioned already that reversion to the mean ensnares a lot of decision makers. This is
so important for investors, however, that it bears additional comment. The sad fact is that there is significant evidence that investors—both individual and institutional—fail to recognize and reflect reversion to the mean in their decisions. To illustrate, the S&P 500 Index generated returns of 8.2 percent in the twenty years ended 2009. The average mutual fund saw returns of about 7 percent, reflecting the performance drag of fees. But the average investor earned a return of less than 6 percent, about two-thirds of the market’s return. The reason investors did worse than the average fund is bad timing: they put money in when markets (or funds) were doing well and pulled money out when markets (or funds) were doing poorly. This is the opposite of the behavior you would expect from investors who understand reversion to the mean." Ironically, investors have learned their lessons: after a nearly 60% ramp from the all time lows, investors continue to refuse to buy when everyone else is buying, contrary to the pleading by Obama, and all the conflicted fly by night permabullish mutual fund managers which CNBC appears to have an infinite collection of to recycle and fill content inbetween all those incontinence ads 24/7.