"Separating Luck from Skill"In companies and in portfolios, luck matters in the short term, but skill matters in the long term. John W. Rogers refers to a work by Michael Mauboussin "Think Twice: Harnessing the Power of Counterintuition" who stated that "over time, skill shines through as luck evens out". He also developed an interesting test of wheather an activity involves skill which asks "if one can lose on purpose". (John W. Rogers, Forbes Magazine, 30 November, 2009; Link)
"The Proof That Active Managers Can Outperform"
Starting with a reference to "A random walk down Wall Street" from Burton Malkiel (1973), Dan Richards outlines different definitions of "active manangement" and highlights the concept of "active share" which was introduced by Martijn Cremer and Antti Petajisto (Yale University) in 2006.
(Dan Richards, ClientInsights.ca, on advisorsanalyst.com, 24 February, 2010, Link).
"Are Outperforming Active Managers Lucky or Skillful?"
Larry Swedroe, principal and director of research for Buckingham Asset Management and BAM Advisor Services, quotes research by Bradford Cornell of the California Institute of Technology, author of the study "Luck, Skill and Investment Performance" who states that "an investment manager who is skillful this year presumably will be skillful next year. An investment manager who was lucky this year is no more likely to be lucky next year than any other manager". Swedroe points out that skill and luck were not directly observable, so fund analysts were left with observing performance. Cornell concluded his study by saying that following: "The analysis also provides further support for the view that annual rankings of fund performance provide almost no information regarding management skill." Swedroe contrasts the research on active management by quoting Professors Eugene Fama and Ken French who claim that "active managers as a group haven´t added any value over appropriate passive benchmarks".
(Larry Swedroe, 10 May, 2010, CBS MoneyWatch.com, Link).
Suggestions, comments and references to additional research articles are welcome