 Good day, fellow investors. Now, a very, very interesting topic within investing is luck versus skill. If you made a lot of money in the last eight years, is it because you were lucky or you were skilled? Or if you lost money, is it because you are skilled but unlucky or unlucky and unskilled? So, it is a very, very delicate question and there are some ways to dig a little bit deeper into knowing whether you are lucky or you are skilled. So, in this video, I'll discuss some scientific research that touches the matter. I'll give you a way to test whether you are just lucky or you are skillful and then we'll conclude with what to do and how to go about luck versus skill and how that really doesn't matter because there is something more than matters even more. So, let's start on the fund manager luck versus skill. Professors Binsberger and Burke from Stanford analyzed 6,000 mutual funds and their performance from 1961 to 2011 and found out that there really are funds that are very skilled and that outperform everything else and create huge returns over longer periods of time. So, we can say that there are skilled fund managers. However, the research also shows that those skilled fund managers charge higher fees so that the average return for the investor is not that much better. And the second thing is that after you make a good track record, investors draw money at you so you become big and when you are big, you find it very difficult to find investments. For example, Seth Plarman has 40 billion in his hedge fund but 42% of it in cash because he cannot find where to deploy so much money. So, there is the issue of fees and size that limits outperforming. Just think of Warren Buffett in his early years returns of 20-30% were the norm. Now, his goal and Munger's goal is to return 10% and they are happy with 10% due to Berkshire's size. Now, secondly, something interesting to think about when thinking about stock markets is, okay, let's say you are skilled, well educated, a lot of experience and you want to compete into the field. The problem is that there are many, many others that are skilled. They know a lot and so you compete among equals. So, there isn't again an advantage of being skilled, especially according to the efficient market theory where everybody is rational and everybody has all the information. So, again, in order to use that skill, you have to look in small caps, which means, again, you need to have little amounts of money to manage. If not, you move stock prices easily if you are bigger in small caps and the second option is, okay, look at value and we have discussed how value usually beats growth over the long term. Nevertheless, it's very interesting how if there are more people skilled, then the competitiveness is also higher and the profits, the abnormal profits are then eaten away from competition among skilled people. So, even if you're skilled, doesn't mean you will succeed in the stock market. Now, is your investment success due to skill or luck? You can do something and test it. So, you are investing, you're doing good. There are some, I'm very happy, some viewers here that are doing 40-50 percent a year investing in growth companies. Okay, that's very good. Now, to see whether you are skilled or just lucky, you should try to do the opposite. Invest in the same sector or look at the same sector and find stocks that will lose, that will go down. If you can, find stocks that will go up. Of course, you are investing in those and at the same time, when you're researching where to invest, find stocks that will go down, then you can call yourself skilled because you can know the difference between good investments and bad investments. If you pick stocks that think will go down but they go up, it means that those investments that you had were winners were just due to luck. So, the next time you have time, look at what are your winners. Okay, and now try to pick some losers. Then put it on a paper, do it virtually, and then see if those losers will really become losers in the next six months, year to five years. So, really see what is your investment horizon and then try to pick winners but also losers. If you don't manage to pick losers but you manage to pick winners and those losers are also winners, then really you have to question, okay, what am I doing is just due to luck. There is something even more important than luck versus skill. Luck versus skill, the question is always can you beat the market? Now, I want to go a step backwards and saying it doesn't matter if you beat the market or not. Investing is personal and related to personal finance and related to your goals for the risk you can take. So, your investment goal, your long-term investment goal should, okay, these are my goals. What's the safest way or the guaranteed way that I will reach those financial goals in my life? Then you don't care about luck, you don't care about skill, you look at the risks of something and you look at the reward. Let's say the SAP 500, of course, it can go on higher and higher for the next 10 years, but the risk is also that it falls down 70% if we get into a recession. So, are those who invest now in the SAP 500 just lucky because the Fed and there is so much money around the world that stocks go just up or they are skilled because they are taking advantage of the trend? We will never know. However, if you're an investor, you should not care what the market does, you should care how your returns are related to your financial goals and how the risk is related to financial goals. All what I said can be synthesized and Charlie Munger does it in the best way. The only message he has for investors is not to do stupid things during your lifetime. So, if you do stupid investments, you risk too much for too little return, then you know that at some point in time you will get unlucky and you will lose everything that you got from the luck when it went okay. However, if you don't do stupid things, you look at the earnings, okay, these are the earnings, what is the risk, this will be my return, am I happy with that return? Yes, then I invest, then over the long term you will look how those earnings will lead you to your financial goals and even with ups and downs, you will add on the downs, you will invest constantly and you will reach your investment goals, no matter luck or skill. So, really think about how investing fits your personal portfolio, how luck fits your personal investments and how skill fits your personal investments. The best way is as always to focus on earnings, look at the long term, my investment goal is very, very long term. I want to create something for when I am 40, 50, 60, 70 or create cash flows that constantly help me enjoy my lifestyle. So, there is the stock market, real estate, businesses, whatever. So, it's all a very, very personal matter and one part of it, just one part of it are stocks. So, it's again a personal risk reward. Nevertheless, let me show you one example that shows how personal that is and how your strategy is the most important thing, not what the market does. Walter Schloss, the legendary Graham student outperformed the SAP 500 by about 7 percentage points per year over almost 50 years, but he underperformed the SAP 500 from 1989 to 1998 by a cumulative 50%. So, over 10 years, Walter Schloss underperformed the SAP 500 by 50%. If you put $100 in the SAP 500, it was 300. After 10 years, if you put 100 with Schloss, it was 150 after 10 years. So, huge underperformance. If he would have had normal investors, they would all put their money away. However, the investors Schloss had were with him for the past 40 years and they knew what he was doing and he knew what he was doing, value investing. From 1998 till 2002, Walter Schloss destroyed the SAP 500 and the cumulative returns over the 14 years now were extremely positive and destroyed the SAP 500. My point is here, it's very, very personal. Can you take 10 years of underperformance because you are doing what you are doing that is in line with your personal financial goals, risk and reward? Or are you going to follow the market because the market is doing better? I hope the market goes up 20% for the next 10 years and if I do 15% over the next 10 years, I'll be happy. I'll be very, very happy for everybody that's invested in the market and for me. My financial goals are different than what the market does and the more we learn not to care about the market, assess investments from a personal risk reward perspective, the better we will do in our financial lives. It depends on the investment side, you never know, but the most important thing is to sleep well and accumulate your wealth in relation to your financial goals. Thank you for watching, looking forward to your comments and I'll see you in the next video.