Fairy dust

Michael Mauboussin, chief investment strategist at Legg Mason Capital Management and adjunct professor of finance at Columbia Business School, talks about the role of skill and luck in The Success Equation. He says that when the overall skill level goes up, luck starts playing a more important role in determining success. That is eerily true for the stock market today.

There was a time when the local stock market was the domain of only a handful of broker-investors who made handsome returns. The rest could only envy them. In the past two decades, though, the industry has grown dramatically with hundreds of broking firms springing up and thousands of analysts, fund managers and wealth advisors joining the fray. With almost every major global investor present in India — directly or indirectly — analysts, too, use the same copybook to analyse and value stocks. Information dissemination has improved dramatically, although that is not to say asymmetry is a thing of the past. When you combine a smart bunch of people with privileged access to information and better analysis, the result is a group fairly high on the skill threshold. Now, as the difference in skills is not as wide as it was earlier, Mauboussin’s theory comes into the picture. Luck perhaps begins to play a more important role in determining returns.

That’s one thing you need to remember when you are going through this special issue we have put together. While there is an assortment of stocks suggested by reputed analysts and investment managers, you need to be aware that however well researched these ideas may be, they will need a generous dose of luck for the stocks to yield good returns. That said, Mauboussin himself concedes that, even at the highest level, investing skills vary — which means you cannot entirely rule out the role of superior analysis in achieving a consistently better return. Lady Luck may be fickle but let us wish that she smiles benevolently on all of us in the New Year. Whatever you invest in 2013, we hope it is profitable.