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How to profit from mistakes
Book review: The Success EquationHow do you tell the difference between luck and skill when it comes to investing? Michael Mauboussin's 'The Success Equation' seeks to answer that question. Matthew Partridge reports.
By Michael MauboussinPublished by Harvard Business Press
We all know that luck, as well as skill, plays a part in virtually any success story. The danger is that we put all our triumphs down to our own abilities, and attribute our failures to bad luck. This is comforting, but it's not going to help you to learn from your mistakes.
So is it possible to split out the role of luck from skill? That's what Michael Mauboussin's book is all about. The 11 chapters can be divided roughly into three sections. The first six emphasise that the relationship between performance and skill is not always especially strong, and that even large variations in outcome may have little to do with differences in skill. The next four look at how statistics can be used to distinguish between meaningful differences in ability and luck.
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Finally, he outlines ten practical rules to follow when doing a task that requires the separation of luck from skill such as investing. These include tips such as developing aids to help you improve. For an investor, this would include keeping a journal of your decisions, and also working on a checklist to consult before you actually make a trade.
It's always hard to get the balance between detail and readability right when writing a popular book about maths. But Mauboussin manages it well. He "excels at explaining his ideas using case studies and examples from investing decisions, college rankings, and hospital procedures", as Publishers Weekly notes.
His mixture of practical and academic experience he is both chief investment strategist at Legg Mason, and a professor at Columbia Business School helps, and he has also written two books on investment. Yet in contrast to fellow academic and investor Nassim Taleb, whose verbosity he gently pokes fun at, Mauboussin comes across as approachable and down to earth. He also resists the temptation to overstate his conclusions. "If you liked Michael Lewis's Moneyball, with its mix of data and great storytelling, you'll very much enjoy Michael Mauboussin's Success Equation," says Jack Covert at 800ceoread.com.
The Success Equation won't turn you into an investment genius overnight. Mauboussin's practical tips are thought-provoking, but it's very much up to you to turn his advice into techniques you can apply to your own investment.
However, the book will give you a much more realistic appreciation of the huge role of luck in determining outcomes, without demoralising you by suggesting that ability and hard work are completely useless. It may also be encouraging to learn that unlike professional sports investing ability doesn't peak until you are in your 40s at least.
The Success Equation: Untangling Skill and Luck in Business, Sports and Investing, by Michael Mauboussin (Harvard Business Press, 288pp, £17.99).
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