Watching the Wimbledon men's final at the weekend, I had the distinct feeling I had seen these two players somewhere before – and that may of course have had something to do with them both reaching at least the semi-final of pretty much every grand slam tennis tournament for the last three years.
All games are a combination of luck and skill to some degree but tennis is one where a very high proportion of success comes down to skill. Clearly luck plays a part – avoiding injuries, close decisions by officials and so forth – but skill is disproportionately important and so it is not so surprising every men’s grand slam final this year has been contested by two of the top four players in the world.
It is unusual for the better tennis player to lose even over a short period of time – say, a set – whereas there are other games where luck is more important. Football is an example where luck can play a bigger factor over short time periods, hence the "magic" of the FA cup, where minnows can sometimes triumph over giants in individual games. However, the FA cup is seldom won by a team outside of the top division. the same logic applies to the premier league, where any team can beat any other on a given day, but over a 38 match season, the skill is revealed and it’s usually Manchester United or Chelsea who come out on top (much as it pains a Liverpool supporter to admit).
A good way to work out the degree to which luck plays a part in a game is to consider how straightforward it would be to lose on purpose. In tennis, you could manage that quite easily but investment is a different matter entirely. There is a huge element of luck in investment and it would actually be quite hard to construct a portfolio you could guarantee would underperform over the next three years. After all, professional investors were once outperformed by a monkey throwing darts.
This is why an investor’s true ability cannot be appraised over the short term. this is a 'game' where skill does come to the fore but only over long periods – Warren Buffett has been doing what he does for decades. Frustratingly, however, investment is also something where people typically use a one-year or a three-year time horizon as the key determinant of whether or not you are any good at it.
The high element of luck involved means these are unlikely to be the best periods over which to make such an assessment. The reason value investment is such a powerful strategy is that it has more than 100 years' worth of history showing it can outperform. The long-term nature of this track record is the factor which makes it so compelling.
Obviously, value can underperform over one and three-year periods but that does not wholly reflect the strength of what is involved and it is over the long term that it has really demonstrated its power. Investment strategies come and go – there is always something that is flavour of the month on a one and three-year basis – but, like Roger Federer, the best will eventually rise to the top. Looking back over the last 50 years – in investment as in tennis – the true greats stand out.