Luck and skill in investing
What separates exceptional investors from the rest? The answer lies at the intersection of systematic skill and stochastic fortune 🌟
𝐓𝐡𝐞 𝐒𝐤𝐢𝐥𝐥 𝐂𝐨𝐦𝐩𝐨𝐧𝐞𝐧𝐭: 𝐒𝐲𝐬𝐭𝐞𝐦𝐚𝐭𝐢𝐜 𝐀𝐝𝐯𝐚𝐧𝐭𝐚𝐠𝐞𝐬
Research demonstrates significant persistence in venture capital returns, suggesting that superior performance stems from identifiable capabilities:
𝘗𝘢𝘵𝘵𝘦𝘳𝘯 𝘙𝘦𝘤𝘰𝘨𝘯𝘪𝘵𝘪𝘰𝘯 𝘊𝘢𝘱𝘢𝘣𝘪𝘭𝘪𝘵𝘪𝘦𝘴: Experienced investors develop sophisticated heuristics for evaluating founder-market fit, often identifying successful entrepreneurs through subtle behavioral indicators that novice investors miss. This represents accumulated human capital rather than fortuitous timing.
𝘕𝘦𝘵𝘸𝘰𝘳𝘬 𝘌𝘧𝘧𝘦𝘤𝘵𝘴 𝘢𝘯𝘥 𝘋𝘦𝘢𝘭 𝘍𝘭𝘰𝘸: Superior investors systematically access higher-quality opportunities through established relationships with successful entrepreneurs, other investors, and industry participants. This creates a sustainable competitive advantage independent of market timing.
𝘖𝘱𝘦𝘳𝘢𝘵𝘪𝘰𝘯𝘢𝘭 𝘝𝘢𝘭𝘶𝘦 𝘊𝘳𝘦𝘢𝘵𝘪𝘰𝘯: The most successful investors provide strategic guidance, operational expertise, and network access that measurably improves portfolio company outcomes. Studies show that companies backed by experienced investors achieve higher growth rates and exit valuations.
𝐓𝐡𝐞 𝐋𝐮𝐜𝐤 𝐂𝐨𝐦𝐩𝐨𝐧𝐞𝐧𝐭: 𝐒𝐭𝐨𝐜𝐡𝐚𝐬𝐭𝐢𝐜 𝐅𝐨𝐫𝐜𝐞𝐬
The role of randomness cannot be dismissed. Venture capital operates within complex adaptive systems where small variations in timing, market conditions, or externalities can dramatically alter outcomes:
𝘔𝘢𝘳𝘬𝘦𝘵 𝘛𝘪𝘮𝘪𝘯𝘨 𝘢𝘯𝘥 𝘔𝘢𝘤𝘳𝘰𝘦𝘤𝘰𝘯𝘰𝘮𝘪𝘤 𝘊𝘺𝘤𝘭𝘦𝘴: Investment vintages significantly impact returns due to factors beyond investor control: interest rate environments, regulatory changes, and broader economic conditions.
𝘉𝘭𝘢𝘤𝘬 𝘚𝘸𝘢𝘯 𝘌𝘷𝘦𝘯𝘵𝘴 𝘢𝘯𝘥 𝘖𝘶𝘵𝘭𝘪𝘦𝘳 𝘙𝘦𝘵𝘶𝘳𝘯𝘴: The power law distribution of venture returns means that a small number of exceptional outcomes drive portfolio performance. These "tail events" often result from unpredictable technological breakthroughs rather than systematic investment processes.
𝐓𝐡𝐞 𝐒𝐲𝐧𝐭𝐡𝐞𝐬𝐢𝐬: 𝐏𝐫𝐞𝐩𝐚𝐫𝐞𝐝 𝐌𝐢𝐧𝐝 𝐌𝐞𝐞𝐭𝐬 𝐅𝐚𝐯𝐨𝐫𝐚𝐛𝐥𝐞 𝐂𝐢𝐫𝐜𝐮𝐦𝐬𝐭𝐚𝐧𝐜𝐞
The most compelling framework suggests that exceptional investment performance requires both systematic skill development and favorable stochastic conditions.
𝘚𝘬𝘪𝘭𝘭 𝘊𝘳𝘦𝘢𝘵𝘦𝘴 𝘖𝘱𝘵𝘪𝘰𝘯𝘢𝘭𝘪𝘵𝘺: Superior investors position themselves to capitalize on favorable randomness through diversified portfolio construction that captures asymmetric upside.
𝘓𝘶𝘤𝘬 𝘈𝘮𝘱𝘭𝘪𝘧𝘪𝘦𝘴 𝘰𝘳 𝘋𝘪𝘮𝘪𝘯𝘪𝘴𝘩𝘦𝘴 𝘚𝘬𝘪𝘭𝘭: Random events either accelerate or constrain the realization of systematic advantages.
The question is not whether good investing requires skill or luck, but rather how skilled investors position themselves to benefit from favorable randomness while mitigating unfavorable circumstances.
