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If you’ve been investing for a while, you’ve probably had that odd experience where you did everything right – like studying a company carefully, buying it at a sensible price, and then holding on with patience – and yet, the outcome felt as random as a coin toss.
It’s frustrating and humbling, and yet, as the leading investment analyst and thinker Michael Mauboussin explains, this is the nature of the world we operate in.
He calls it the paradox of skill.
The idea is simple but has a deeper meaning to it: as people become better at an activity, the difference between the best and the average shrinks. Everyone is so skilled that the outcome often swings on luck in the short term.
Now, it’s not that skill doesn’t matter. In fact, it matters immensely over the long run. But in a highly competitive, high-skill field like investing, luck tends to dominate day-to-day results because the margin separating the best from the rest is razor thin.
Mauboussin writes in his book The Success Equation:
As people become more skillful, luck becomes more important. That’s precisely what happens in the world of investing. 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.
I find the clearest illustration of this idea in modern cricket, particularly One-Day Internationals. If you look back to the 1980s and 1990s, a first-innings score of 220 or 240 was often enough to win. Teams like West Indies or Australia could post 250 and feel almost certain of victory because the gap between the best sides and the average ones was wide. A weaker team didn’t have the batting depth, the fitness, or the confidence to chase down that score.
But look at the game today. Thanks to better bats, flatter pitches, advanced analytics, and years of professional conditioning, nearly every international side is capable of posting or chasing 300. The absolute skill level of the sport has risen tremendously, but the relative skill gap has narrowed.
Image source: https://ckrao.wordpress.com/2017/12/26/the-evolution-of-odi-team-totals/
The consequence is fascinating: winning has become more sensitive to luck. Tosses matter more than ever. Small and random events like a slight change in pitch behaviour between innings, a misjudged catch, or a lucky edge that finds the boundary instead of a fielder now decide outcomes because both teams are operating at such high and similar levels of skill.
A statistical analysis of over 44,000 matches even shows that winning the toss gives a team a 2–3% better chance of winning in ODIs. That’s not much, but when skill is evenly matched, even a small random edge is decisive.
It is not unusual now to see teams score 300+ runs and still lose, or games go down to the very last over despite both sides playing almost flawlessly. That’s the paradox of skill in action: the better everyone gets, the more the short-term results look like chance.
The same dynamic plays out in business. If you’ve ever run a business or watched companies compete fiercely, you know that improving in absolute terms doesn’t guarantee you’ll stay ahead. It depends entirely on what your peers do.
Consider the case of, say, two retailing companies, both focused on boosting inventory turnover ratios as a key efficiency metric. One retailer improves its turns from about 3.5 to 4.7 in five years, which by most measures, is a success story. But its main rival over the same period escalates its ratio from roughly 5.1 to about 7.2. So, although the first company got better in absolute terms, its relative position actually worsened. This is classic paradox of skill, just like in sport, where being better isn’t enough if everyone else is improving too.
Now, consider investing. A century ago, the markets were an uneven playing field. Information travelled slowly, and the gap between the skilled and the average was wide. Someone like Ben Graham or Philip Fisher, or even RK Damani or Rakesh Jhunjhunwala could spot mispriced securities with much higher confidence because most people weren’t even looking.
Today, the landscape is crowded with thousands of highly trained professionals armed with MBAs, CFAs, PhDs, real-time data, machine learning tools, LLMs, and the ability to value businesses in a dozen different ways. The absolute skill level in the market is extraordinarily high. But the difference between a top-tier fund manager and an average one has never been smaller.
When everyone is very good, luck naturally plays a bigger role in short-term results. A single macro event, a surprise regulatory decision, or a quarterly earnings miss can swing performance enough to make a skilled investor look like a fool or a genius, at least for a while.
Human nature, unfortunately, makes this harder. As Mauboussin notes, we are wired to connect cause and effect, and we love narratives. We see a fund that outperforms in a year and instantly credit the manager’s brilliance. We see another lag and assume incompetence. Rarely do we pause to ask how much of what we are seeing is dumb luck.
Look at these two tables of mutual fund performance from FundsIndia Research. You can see the paradox of skill at work. Among the top‑30 diversified equity funds in any given three‑year period, very few remain in the top tier in the subsequent three years. The red blocks in the tables tell the story. Most top performers eventually slip out of the top‑30 ranking in the next cycle, and sometimes even plunge far down the list.
This reflects that as fund managers as a group become more skilled, the performance gap narrows, and luck increasingly drives short‑term outcomes. Everyone is highly trained, has access to similar research, and is competing in the same markets; so, just like in elite sports, the difference between the best and the rest is razor thin.
Lessons for Investors
Understanding the paradox of skill isn’t just an intellectual exercise. It has very practical lessons for investors.
First, you need to respect the role of randomness. It is very tempting to read too much into short-term performances, whether they’re your own or someone else’s. A great year does not confirm genius, and a bad year does not confirm foolishness. The paradox of skill tells us that in today’s market, the short run is mostly noise, and luck often overwhelms even the most careful process.
The second lesson is that time is your only reliable filter. If you want to distinguish skill from luck, you must give outcomes a long enough runway for randomness to even out. This is why patient investing is not just a virtue but a necessity. Without time, all you are doing is reacting to a coin toss disguised as a performance chart.
The third lesson is humility. Understanding that even the most skilled investors are at the mercy of luck in the short run should temper both your pride in success and your despair in failure. It should also make you cautious about hero-worshipping managers and chest-thumping investors on Twitter based on a single cycle. True skill in investing is often quiet and invisible until many years have passed.
Another deeper implication of the paradox of skill is that if you want to improve your odds, you must play in arenas where luck has less influence, or at least where you can survive the swings of luck without getting knocked out. That could mean focusing on markets or companies that are less crowded, where competition is lower and your skill has room to express itself. It could mean building a portfolio and a temperament that can endure periods of underperformance without forcing you to capitulate.
And it certainly means prioritising process over outcome. If you anchor your self-worth or your strategy purely to recent returns, you will end up chasing luck, not skill, and luck will eventually abandon you.
Recognising the paradox of skill forces you to think more like a test match player than a T20 slogger. Your job is to survive, stay disciplined, and give your edge time to compound.
I often think back to modern ODI cricket when I see investors panicking over quarterly fund rankings. A team can score 300+, play a nearly perfect game, and still lose because a couple of small breaks went against them. That doesn’t make them bad, just unlucky. The markets are no different.
If you can accept that, you invest with more calmness and less ego. You stop overreacting to every bounce of the ball. And you start appreciating that in the long run, just as in a long tournament, the best teams and the best investors find a way to let their skill shine through. And this is not because luck disappears, but because patience gives skill the time it needs to speak.
The paradox of skill, at its heart, is a call to humility, patience, and process. The game is fairer than it looks, but only if you give it enough time.
Also Read:
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