The Elusiveness of Investment Skill

Abstract

This article focuses on investment skill and presents several important discussion points. The first and most preliminary point is that skill is rare, hard to quantify, and takes many forms. A second point addresses the main insights of the efficient market view of the world—that there are no market inefficiencies and markets are unpredictable. These insights do not rule out skill, rather they tell us what skill is not. The article then separates the notion of market efficiency from the myth that investors are totally rational, and the idea that markets are unpredictable from the myth that markets follow a random walk. The article then draws a distinction between skill and "investment systems" and between skill and performance. The author concludes that an efficient view of markets does not rule out skill, but does rule out the myth that skill can be detected from historical performance alone and that it is a reliable predictor of future success.