Encomium Moriae

The problem in relying on evidence of superior management skills is that winning strategies tend to have a brief half-life. Capital markets as active and liquid as ours are so intensely competitive that results from testing ideas on past data are difficult to replicate or sustain in real time.Many smart people fail to get rich because people not so smart soon follow in their footsteps and smother the advantage their strategy was designed to create.

Because of the danger that free-riders will hop aboard a successful strategy, it is quite possible that there are investors out there who beat the market consistently beyond the probability of luck, but who stubbornly guard their obscurity. Nobel Laureate Paul Samuelson, an eloquent defender of the hypothesis that markets act as though they were rational, has admitted that possibility: ‘People differ in their heights, pulchritude, and acidity, why not in their P.Q., or performance quotient?’ But he goes on to point out that the few people who have high P.Q.s are unlikely to rent their talents ‘to the Ford Foundation or the local bank trust department. They have too high an I.Q. for that.’ You will not find them on Wall Street Week, on the cover of Time, or contributing papers to scholarly journals on portfolio theory.

Instead, they are managing private partnerships that limit the number of investors they accept and that mandate seven-figure minimum participations. Since they participate in the capital appreciation as well as receiving a fee, adding other people's money to their own gives them an opportunity to leverage their P.Q.s. It may well be that some of them would qualify as Snap champs.

Their strategies draw on theoretical and empirical concepts that reach back to the origins of probability and to the Chevalier de Mere himself. But those strategies incorporate a more complex view of market rationality than I have set forth. If there is validity to the notion that risk equals opportunity, this little tribe is showing the way.

~Against the Gods: The Remarkable Story of Risk by Peter Bernstein