Luck vs. Skill in Investing: Why There Are No Gurus, Only Cycles

During their recent episode, Taylor, Carlisle, and Michael Gayed discussed Luck vs. Skill in Investing: Why There Are No Gurus, Only Cycles. Here’s an excerpt from the episode:

Tobias: Self abnegnation. I don’t mind that as a strategy.

Michael: Well, I’ll tell you something. Actually, I’m half joking about it, but also half serious. Look, you mentioned all these anonymous accounts showing screenshots of all these hundreds of thousands or millions of dollars they’re making on a single trade. It’s like, okay, first of all, I don’t believe any of this stuff, but okay, let’s assume it’s real. That’s luck. I don’t give a damn what anybody says, there’s a degree of luck in this industry. And probably a much larger degree than people realize.

You cannot, in our business, when it comes to investing, control the outcome. We actually have very, very little control. Very, very little control. Every trader has very, very little control, because so much of this stuff is noise. You want proof of that? Look at any chart that shows here’s what happens when you remove the 10 best days and 10 worst days.

Jake: My favorite example is to try to pick what you think is going to do the worst in a year from now. It’s incredibly difficult to do.

Michael: Yeah. God knows how–

[laughter]

Michael: So, I was very dead wrong on that. Although I said never to short, because shorting doesn’t work. That’s a whole different thing. But the point is that, so if you can’t control– It’s in our DNA that we need to have a sense of control. So, you can’t control the cycle you’re in, you can’t control the cards you’re dealt you choose to play the game. What can you control? Your damn health. [laughs] So, sometimes the only way to salvation is to suffer and control what you control in that suffering. Candidly, I have zero problem saying this. I’m very public about this.

I launched my mutual fund day of QE3. Risk on, risk off. At the start of the purest risk on cycle since the mid-1990s. Okay. A couple good years here and there. Nothing really spectacular. I’m on the road. I’m killing myself to try to build a name. I know the research, I know the studies, I also know that QE3 has distorted things, but I think it’s going to end soon. I think it’s going to end soon. I think it’s going to end soon. It doesn’t. It doesn’t. It doesn’t. 2020 comes along, my mutual fund’s up 72%. I suddenly raised $350 million single handed. I’m like, “After all these years of grinding, I made it. I hit the escape velocity. I’m not going down again. This is my moment.”

Jake: Overnight success story.

Michael: Overnight success after [Tobias laughs] 10 years, right?

Jake: Yeah.

Michael: Again, it’s not based on my opinion. It’s rules based. It’s like, I just built the strategy and the strategy took care of itself. And then, it all gets ripped away from me. Fastest rate high cycle in history. No credit spread blowout, no flight to safety trade. Whipsaw, whipsaw, whipsaw, whipsaw. You try to go small caps, it doesn’t work. You try to go emerging markets, it doesn’t work. Of course, whatever I ended up eating a lot, they call comfort food for a reason.

I think with hindsight I was probably myself going through some form of high functioning depression. How could I not? I thought I made it. It’s like, the whole 15 minutes of fame thing. I’m not Cathie Wood. I didn’t hold it, right.

Tobias: Yeah.

Michael: Yeah. Anybody that’s been in this business will have a story like that at some point. Maybe mine was more extreme than others. So, it got to a point where it’s like I can’t control it. I can’t control the cycle in it. As the reason why I keep saying this, there’s no gurus. Only cycles.

Tobias: Yeah.

Michael: There’s no gurus. Only cycles. So, what can I control? I control my health. I still am optimistic on my strategies. It’s like, after all this, I’m still here. I know I have the audience to turn it up when it’s there.

Tobias: Yeah.

Michael: I know the tail events out there. I hope it’s this year. Not because I want to see people lose money, because I never said the tail event would mean stocks would stay down, but it’s the reset you need to write the hell of 2022, which I’m still dealing with the ghosts of where stocks and treasuries did terrible, where avoiding a drawdown in stocks by being in treasuries was worse than being in the drawdown for stocks.

Tobias: Yeah.

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