Separating Skill From Luck In Investment Performance

Separating Skill From Luck In Investment Performance by Covenant Capital Management

“So, how did you guys do last month?”

It seems like the most natural and logical question to ask an investment manager. But is it the right question to ask? I suspect that most managers either cringe or rejoice internally upon hearing this question depending on how they actually performed the previous month. Almost implied in the question is the notion that the manager’s recent performance is some sort of indicator of his ‘skill’ at investing. But was it skill or was it luck (good or bad) that constituted that month’s performance? And how can one possibly separate the two?

A Laboratory for Luck and Skill

Luckily (or should we...