Purchase Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets

The book is entertaining and peppered with anecdotes and generally a good read. The authors basic premise is that in markets it is hard to tell the difference between luck and skill, and that given a large enough initial population, there will always be a handful of 'lucky idiots' who make it big for a given period of time. He uses probability theory to justify this - e.g., given 10,000 money managers and a 50% chance of being successful each year, there will be a couple of hundred left after five years who survived just by random luck. This is fundamentally incorrect because, unlike coin flips, the behaviour of those 10,000 managers is not independent of each other. More accurately, given 10,000 managers there might be a 100 trading strategies that are truly independent of each other, and even then when you throw in factors like leverage, margin calls, interest rates, political events and human behaviour, there are a lot fewer 'degrees of freedom' in the market. In fact, if everybody pursued trading strategies that were truly independent there would be far volatility in the market than we see today. When it comes to judging companies, the author is even further off the mark. Here, past performance is a pretty strong indicator of future performance. I would rather invest in a company with a 10 year track record of delivering strong profits in a manner that I can understand than the newest, flashiest kid on the block - then again I'm an investor not a 'trader', and I've ridden out highs and lows for the last 10 years with a moderate degree of success.

I agree with a few things he says - like the fact that daily 'news' is corrosive to the human brain, especially to the investor and that there are 'black swan' events that catch people off guard. However I couldn't help but think of Donald Rumsfeld's humorous "known unknows" and "unknown unknowns" comment as I read about black swans. As the author appropriately quotes, "There is nothing new under the sun".Get more detail about Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets.