Is Investing a Skill?
Been wondering this for some time - at least, before I put my life’s work into this. I do think investing is interesting. But if a newbie can theoretically earn a better return than an “expert” investor, then is investing too random of a task - and to that extent, career - to really devote oneself too?
I say this because you might spend years studying investing and gaining experience, just to invest in a complete dud while Joe Nobody gets 10% in an index fund. You wouldn’t see a random person perform a better surgery than a doctor or win a case against a lawyer. Am I missing something here?
Investing is just gambling if we are being brutally honest with ourselves. The best gamblers aren't the ones who see into the future or go to a poker table blindly and hope for the best. They stack the odds in their favor by only playing hands that have a high chance of success for the long run and take mitigated losses when they realize they don't have a winning hand. The skill in investing is how do you increase the odds of success while minimizing any losses that you might have as a result of the risks you're taking. You'll never have a 100% hit rate in investing but winning 80% of the time making 15-20% returns and only losing 5-10% of the initial investment on your "losers" leads to a winning strategy with enough swings at the plate.
ETFs are a product that asset managers created for Joe Nobody to invest in, so someone (an authorized participant) needs to be there to reallocate the portfolio as the markets change the NAV. So even while everyday people can invest and hope to get an average of 10% over time, there's someone who is doing the actual valuations and investing on the other end of that.
Thank you! OP here. Essentially my question is: If a student and seasoned PE professional are evaluating a set of private businesses or stocks, will the PE professional have a major advantage? Why?
Yes, the PE professional will have a major advantage but that's because they've spent countless hours and years evaluating businesses and understanding their business models, valuations, markets, industry, etc. That being said, PE teams use advisors, consultants, lawyers, experts, etc. to help them better understand the business but largely its due to experience and a broader understanding of markets. Each time you make a new deal, you gain a new perspective and insight into the industry - it's why you have various investors focus on specific businesses/sub-industries. It's not that the student is less intelligent, it just doesn't have the experience to fully understand the investment highlights or risks.
A lot of it is getting lucky and riding the right wave at the right time, but you need to create the surface area for that luck to occur. I know for some of our exits I've been really surprised by the weird chain of events that led to the exit.
If you take apart the the actual returns, the skill isn't in the idiosyncratic bets you make on businesses. That's a much smaller portion
It's mostly the macro bet that you inherently take on overall that's very correlated with the performance of the SP500
And you already know how hard it is to time the market
I’ve heard a lot of investors say timing the market is a fool’s game. In that case, based on what you said, is there really any skill involved?
Lots of the success in investing comes from access. The best, most experienced investors get the best deals. A lot of the best deals are super competitive and everyone knows they’re good. Controlling for purchase price, it comes down to reputation.
So is what makes the great investors great their negotiation/ability to win deals moreso than their savvy in picking the best investments?
As an incoming SA who hopes to eventually be an investor, I'm just wondering how I can direct my efforts so that I can make a little progress toward developing that skillset day by day. Should I read more? Should I invest myself? Should I try to learn about how to win deals? I just feel a little bit lost tbh
Look at Buffet, Ackman or Simons and tell me that investing isn't a skill.
Lol @ Ackman
Ok prospect
Immense survivor bias. Buffet and Simons are brilliant but also started their careers when access to information wasn't widespread. HF/PE is much more like extremely detailed gambling with LP money than people think
OP here. This is kinda the point I was wondering about. There’s so much knowledge out there and there are so many variables. Is there too much luck to say it’s skill dependent?
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