A Bow to Lady Luck

Heard the one about the monkey and the typewriter?

"If one puts an infinite number of monkeys in front of (strongly built) typewriters and lets them clap away, there is a certainty that one of them [will] come out with an exact version of the 'Iliad,' " writes Nassim Nicholas Taleb in a recent book, "Fooled by Randomness."

The monkey typist story is an old one, and the key word is "infinite." But Taleb takes this hoary tale a step further. "Now that we have found that hero among monkeys, would any reader invest his life's savings on a bet that the monkey would write the 'Odyssey' next?"

Taleb's point is that the past frequently tells us nothing at all about the future, even though many of us believe it does and make investments accordingly. "Think about the monkey showing up at your door with his impressive past performance. Hey, he wrote the 'Iliad.' "

The lesson here for investors is powerful and frightening. How much can you rely on the track records of investment advisers, mutual fund managers, newspaper columnists or even the market as a whole in making decisions about your investment portfolio? Not nearly as much as you probably think.

Taleb's argument is that people are often tricked, mainly by the architecture of their own brains, into thinking that things that happen at random are actually happening by design. Adam Smith, the great Scottish economist and philosopher, wrote more than two centuries ago of "the overweening conceit which the greater part of men have of their own abilities [and] their absurd presumption in their own good fortune."

Taleb's book, which is full not only of infuriating meanderings and off-putting self-importance but also of extreme brilliance, changed the way I think about investing.

"Fooled by Randomness" is loaded with crackling little insights, but the best one is that what looks like skill is often plain old luck, so beware of investment geniuses. They will get their comeuppance, just as Solon warned. Solon was an upright ancient Greek legislator, known for speaking his mind. When King Croesus of Lydia, the richest man of his day, bragged to Solon about his wealth, Solon admonished, "The uncertain future is yet to come, with all the variety of future." And it did. Cyrus defeated Croesus and nearly burned him at the stake.

"When people buy stocks," wrote Meir Statman, a finance professor at Santa Clara University and one of the leading experts on markets, "they think they are playing a game of skill. When the stock goes down rather than up, they think they have lost their knack. But they should take heart. All they have lost is luck. And next time, when the stock goes up, they should remember that was luck, too."

My own view is that it's not all luck, but it's mainly luck. Much of what investors do in picking stocks -- the research, the listening, the talking, the reading -- is nothing more than wheel-spinning. It wastes time and gets them nowhere special.