It hasn’t been a great couple of years for Neil Woodford — and it has been just as miserable for the people who have entrusted money to his investment funds. Mr Woodford was probably the most celebrated stockpicker in the UK, but recently his funds have been languishing. Piling on the woes, Morningstar, a rating agency, downgraded his flagship fund this week. What has happened to the darling of the investment community?
Mr Woodford isn’t the only star to fade. Fund manager Anthony Bolton is an obvious parallel. He enjoyed almost three decades of superb performance, retired, then returned to blemish his record with a few miserable years investing in China.
The story of triumph followed by disappointment is not limited to investment. Think of Arsène Wenger, for a few years the most brilliant manager in football, and then an eternal runner-up. Or all the bands who have struggled with “difficult second-album syndrome”.
There is even a legend that athletes who appear on the cover of Sports Illustrated are doomed to suffer the “SI jinx”. The rise to the top is followed by the fall from grace.
There are three broad explanations for these tragic career arcs. Our instinct is to blame the individual. We assume that Mr Woodford lost his touch and that Mr Wenger stopped learning. That is possible. Successful people can become overconfident, or isolated from feedback, or lazy.
But an alternative possibility is that the world changed. Mr Wenger’s emphasis on diet, data and the global transfer market was once unusual, but when his rivals noticed and began to follow suit, his edge disappeared. In the investment world — and indeed, the business world more broadly — good ideas don’t work forever because the competition catches on.
The third explanation is the least satisfying: that luck was at play. This seems implausible at first glance. Could luck alone have brought Mr Wenger three Premier League titles? Or that Mr Bolton was simply lucky for 28 years? Do we really live in such an impossibly random universe?
Perhaps we do. Michael Blastland’s recent book, The Hidden Half, argues that much of the variation we see in the world around us is essentially mysterious. Mr Blastland’s opening example is the marmorkrebs, a kind of crayfish that reproduces parthenogenetically — that is, marmorkrebs lay eggs without mating and those eggs develop into clones of their mothers.
Place two clones into two identical fish tanks and feed them identical food. These genetically identical creatures raised in apparently identical environments produce genetically identical offspring who nevertheless vary dramatically in their size, form, lifespan, fecundity, and behaviour. Sometimes things turn out very differently for no reason that we can discern. We might as well call that reason “luck” as anything else.
This is not to say that skill doesn’t matter — merely that in a competition in which all the leaders are highly skilled, randomness may explain the difference between triumph and failure. Good luck plus skill beats bad luck plus skill any time.
It is easy to underestimate how much chance is at play all around us. The psychologist Daniel Kahneman has recently been studying what he calls “noise”: the variability of judgments for no obvious reason.
A wine expert blind-tasting two glasses from the same bottle will often rate them differently. Pathologists disagree with each other in their judgments of the same biopsy. More disconcertingly, they also disagree with their own prior judgments of the case.
We rarely appreciate just how much inconsistency there is in the judgments we and others make, argues Prof Kahneman. It can hardly be a surprise, then, if past performance is no guarantee of future success.
We should remember, too, that people often achieve outsized success by taking risks or being contrarian. When John Kay examined the forecasting record of economists in the 1990s, he noted that Patrick Minford, an idiosyncratic forecaster, would often produce the best forecast one year and the worst forecast the next. If the consensus is wrong, being an outlier gives you a high chance both of dramatic success and spectacular failure.
We perceive all this randomness through a particular filter, too. Few people make the cover of Sports Illustrated after a run of mediocre luck. They appear after things have been going well, and if the good luck fails to hold then it seems like the SI jinx. More likely it is “regression to the mean”, or in simple terms, a return to business as usual.
We begin paying attention only when someone is producing a remarkable performance. Genius followed by mediocrity is a story arc we all notice. Mediocrity followed by genius just looks like genius — assuming the mediocre performer gets a second chance. Not all do.
So I wish Mr Woodford well. Perhaps he has lost his touch, perhaps the world has changed, or perhaps he has simply been unlucky. It would be nice to know which, but in such matters the world does not always satisfy our curiosity.
Written for and first published in the Financial Times on 24 May 2019.