Luck vs. Skill: Rolling the Dice in Asset Management
Picture a championship poker table. The pros know the odds, calculate the probabilities, and play with discipline. But in any given hand, even the most skilled player can be sunk by a bad draw and sometimes the rookie wins a massive pot with a lucky river card.
This is rather analogous to investing in equity markets. The cards are the market’s daily returns, the chips are your capital, and the players are asset managers vying for an edge. Skill matters, but luck can dominate in the short run, and even the best players can’t control the deck.
The Arithmetic Problem
Before we even consider luck, investing starts with a simple equation. William Sharpe’s Arithmetic of Active Management makes the math unavoidable: before costs, active managers as a group must match the market; after costs, they must lag it.¹ That’s not cynicism, it’s arithmetic.
A few managers will win, many will lag, and the average investor almost inevitably falls behind once fees, taxes, and transaction costs are included.
When Luck and Skill Collide
Noble Prize Laureate Eugene Fama and Professor Kenneth French examined decades of U.S. equity mutual fund returns and compared them with thousands of simulated “pure luck” portfolios.² Their finding? Only a tiny handful of managers produced returns beyond what luck would explain. After costs, even those at the top offered no reliable persistence.
Like poker, streaks happen, but it’s hard to tell if the player’s skilled or just riding a lucky shuffle.
The Paradox of Skill
Michael Mauboussin’s Paradox of Skill helps explain why lasting outperformance is rare. As average skill rises, the differences between competitors narrow, making outcomes increasingly driven by luck. In markets, where information is abundant and competition fierce, inefficiencies are quickly traded away.³
And the challenge isn’t just finding skill, it’s proving it. Even if a manager produced an average 2% alpha (outperformance relative to a benchmark) with a 6% standard deviation, you’d need 36 years of performance data before you could be 95% confident that the result wasn’t just luck. By the time you reached that statistical certainty, the manager might well be retired or enjoying life on a yacht.⁴
Put simply, even when skill exists, it takes decades of data to prove it with confidence — far longer than most investors are willing (or able) to wait.
Think of it this way: put 10,000 people in a room and have them flip a fair coin 10 times. Statistically, about 10 of them will flip heads every single time. Their streak would look impressive, but we wouldn’t declare them master coin-flippers. In investing, as in coin flipping, streaks can emerge entirely by chance.
Even truly skilled managers can see their edge erode as assets grow, agility declines, and market impact rises.
At Westmount Wealth Management we address this by leaning on the weight of academic evidence. Our approach seeks to systematically tilt portfolios toward long-term drivers of return while selectively incorporating institutional-grade alternatives. The goal: durable drivers of wealth, not fleeting streaks.
The Long Game Reality Check
The S&P Indices Versus Active (SPIVA) reports make this concrete. As of year-end 2024, over 85% of U.S. large-cap equity managers⁵ and more than 80% of Canadian equity managers⁶ underperformed their benchmarks over 10 years.
Percentage of Active Equity Managers Underperforming Benchmarks (SPIVA Year-End 2024)
Short-term luck can disguise this underperformance, but over time, costs and competition grind away at results. Skill must persist, and persistence is rare.
Why Investors Keep Chasing “Stars”
We love the idea of the brilliant strategist who sees what others miss. Skill is hard to detect in real time, and by the time it’s statistically evident, it may have already faded.
In poker terms: you might buy into a table because a player’s been hot all night, only to watch them bust out before dessert is served.
Our approach resists these temptations. By privileging evidence, structure, and research over short-term narratives, we help clients avoid reactionary decisions and keep portfolios aligned with enduring principles.
Controlling the Controllables
If skill is rare and fleeting, investors should focus on what they can control:
Cost – Favor low-fee investment options where it is sensible to do so; fees compound against you. Put simply, if you are going to spend your hard-earned dollars, make sure that you are getting value-added unbiased counsel in return, like retirement, tax, and estate planning.
Tax Efficiency – Minimize turnover and manage gains to keep more of your returns.
Diversification – Spread across asset classes, sectors, and geographies to reduce reliance on any single bet.
Goal Alignment – Measure success by progress toward your personal objectives, not by beating a random benchmark.
Bottom line: In the short term, luck can make the novice look like a genius and the pro look like a fool. Over the long term, the math is unforgiving, and enduring skill is rare. The surest way to “win” isn’t to beat the market at its own game, it’s to play the odds intelligently, control what matters, and stay aligned with what matters most: your goals. By doing so, you don’t just play the game, you tilt it toward lasting success.
³ Mauboussin, M. J. (2012). The Success Equation: Untangling skill and luck in business, sports, and investing. Harvard Business Review Press. ISBN 9781422184233.
⁴ Index Fund Advisors, Inc. “The Paradox of Skill. Published February 8, 2018. Research by Brad Steiman, Dimensional Fund Advisors.
⁵ S&P Dow Jones Indices. (2025). SPIVA® U.S. Year-End 2024 Scorecard. S&P Global.
⁶ S&P Dow Jones Indices. (2025). SPIVA® Canada Year-End 2024 Scorecard. S&P Global.
This information has been prepared by Damir Alnsour, MBA, CFA, CFP®, FCSI® who is Head of Portfolio Management, Portfolio Manager, Financial Planner for Westmount Wealth Management Inc. Westmount Wealth Management Inc. is registered as a Portfolio Manager in British Columbia, Alberta, and Ontario. Westmount Wealth Planning Inc. is a subsidiary of Westmount Wealth Management Inc.
This material is distributed for informational purposes only and is not intended to provide personalized legal, accounting, tax, or specific investment advice. Please speak to a Westmount Wealth Advisor regarding your unique situation.
