22 Mar 2010
Luck and Judgement - Being a Fund Manager
Being a fund manager does take skill and courage, but Robert O’Riordan considers the part luck plays too
“We are merely the stars’ tennis-balls, struck and bandied/Which way please them”
John Webster, The Duchess of Malfi, 1623
When the little silver roulette ball comes to its silent rest, only a fool will claim that it landed there as a result of individual courage, skill or foresight. The schoolchild who makes the correct call on the toss of a coin is unlikely to really believe that he or she has the gift of prophecy. However, when it comes to market predictions, and probably sport too, the separation of skill and luck is less clear.
Any golfer knows that mysterious and inexplicable forces go to work every time a putter is pulled back. While lots of practice, good concentration (or ‘focus’ as it is now called) and the use of the ‘lucky’ putter might help, most of us feel that, once we have struck the ball, we are in the hands of the gods. Hearing a satisfying plonk as the seemingly impossible 20-yard putt is sunk, the happy golfer is more likely to say, “Phew, that was lucky”, than “Wow, I am just brilliant and so skilful”. Depending on the company you keep, the reaction of your fellow players may be more disingenuous, generous or just downright rude.
The fund manager who sells shares in a company just before the share price takes a sudden, apparently random plunge will usually react in the same way as the successful putter. With hindsight, too, the timing of a purchase can also occasionally appear miraculously lucky. The converse holds true: the market is littered with just as much evidence of bad as good luck. The unlucky, along with the incompetent and the dishonest, will usually move on to other professions and occupations.
As Gary Player once said, “the harder I practise, the luckier I get”. Perhaps this also applies to fund management. In terms of investment, consistent and persistent luck might in fact be that rare thing: a highly developed and accurate investment instinct. While there are some relatively inexperienced yet successful fund managers, it seems logical to think experience has a significant influence on success.
Looking at the track record of a particular fund manager, it is almost impossible to separate out scientifically the elements of luck and skill, and it is a task that will frustrate even the actuaries and analysts who are paid to assess fund managers. Even the most skilful fund manager will be subject to bouts of bad luck occasionally. Like a randomly thrown set of darts, luck may also form mysterious and inexplicable clusters. To become confident and successful, a fledgling investor, or fund manager, must inure him or herself to both luck and fate.
Robert O’Riordan is responsible for liaising with all of the investment trust boards at Baillie Gifford and is also responsible for communications with shareholders.