Does your mutual fund have a good PM, or just good luck? A PM tries to answer that question in his new book, The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing.

That’s the question the Wall Street Journal asks Michael Mauboussin, the chief investment strategist at Legg Mason Capital Management [profile]. His answer is very clear: luck is extremely important to investments, with skill oftentimes only shining through in the long run.

The reason that luck is so important isn't that investing skill isn't relevant. It's that skill is very high and consistent. That said, over longer periods, skill has a much better chance of shining through.

In the short term you may experience good or bad luck [and that can overwhelm skill], but in the long term luck tends to even out and skill determines results.

Mauboussin goes on to say that indexing makes good sense for those investors who can’t identify which managers actually have “differential skill.”

In a question that likely struck close to home for Mauboussin he discusses former Legg Mason PM Bill Miller-s 15-year streak beating the S&P 500 index, followed by his several years of poor performance.

Both of these periods, Mauboussin says, likely involved some skill and a significant amount of luck.

To read more of the interview, and to see a chart where Mauboussin compares the luck involved in investing with other endeavors like soccer, slot machines and darts, read the original story here in the WSJ's monthly "Investing in Funds" special report. 

Edited by: Ben Geier


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