Michael Mauboussin, the Chief Investment Strategist for the well known fund manager Legg Mason, provides some interesting insights into the reasons why most investors perform poorly over time, and what are the key skills to develop for successful investing. He has written several books and is an adjunct professor of finance at Columbia University. He was interviewed recently by WealthTrack and I have summarised below the key points:

-While more hard work leads to better results in most spheres of life – it doesn't necessarily do so in the investment world where investors do too much and typically end up buying high and selling low. Often, sitting tight and not doing anything is the best course of action.

-Surveys of a variety of investor groups (including institutions) have shown that they typically hire managers who have recently outperformed and fire managers who have underperformed – and that they would have been better off over the following two year period if they had stayed with the underperforming managers.

-Investors suffer from a "recency bias" and their returns have lagged returns on mutual funds as they chase the hot funds of the day. The key is to find an asset which is unloved and cheap and then hold it (which is different from just buy and hold).

-Most activities in life lie somewhere along the continuum of pure skill, no luck and pure skill, no luck. Investing falls more towards the luck end of the spectrum, and that is why it is so hard to beat the market as everyone is working really hard at it and their skills sort of cancel out.

-It is therefore important to have longer time periods to assess managers (and strategies) as it is only then that their skills will be apparent. In the short term it tends to be noisy and luck plays a key role.

-Really good performances (or outcomes in other aspects of life) are usually a result of skills with lots of good luck – and luck tends to be transitory and mean reverting. 

-There are three important skills to develop as an investor: 1) an analytical edge – which, firstly, requires the ability to analyse the difference between the price of an asset and its fundamentals, and, secondly, to position a portfolio appropriately by provide higher weightings to the good ideas , 2) behavioural - to avoid the traps and biases we are all prone to – i.e. over confidence and be overly swayed by market sentiments which tempts us to buy high and sell low, 3) institutional barriers – to avoid being with the pack.

-The well known value investor Seth Klarman of Baupost Group said it best: "Value investing is at its core the marriage of a contrarian streak with a calculator" implying that when everyone loves or dislikes something, take out your calculator and try to spot the discrepancy between the price and its fundamentals.

-The capital accumulation rate of a stock, which is determined by its price, is what matters to an investor. Dividend paying strategies only work if you assume that the dividends are fully reinvested with no taxes. For example, a sock worth $100 which pays a dividend of $3 is then worth $97 , and will be worth $100 only if you reinvest the full dividend.

-The market is currently attractively valued with the S&P500 estimated p/e for 2012 at around 12 versus a historical average of 15/16 – implying a yield of 8.3% which provides an excess return over treasuries of about 5%.

-US corporate balance sheets are healthy, and in particular the large multinationals are trading at attractive valuations and provide an attractive investment opportunity.

Thought provoking insights from Mauboussin and while we would all like to attribute our success to a superior set of skills – it is more often likely to be a result of luck! This is also the point made of Nassim Taleb in his book "Fooled by Randomness". Does this mean we give up working on our skill s? – of course not! – as he notes, luck is mean reverting, so developing your skill set and being prepared to take advantage of a favourable change in fortune would be an appropriate strategy. His observation on dividends is also instructive – dividend paying stocks have done well over long periods because the have also exhibited solid earnings growth, but the assumption underlying this thesis is that the dividends are reinvested and not spent! And on his final (and in my view) most important point, "be a contrarian with a calculator" – Greece and Tepco bonds anyone?!

With the abysmal job growth number released this Friday, the debate between austerity and further fiscal spending is likely to intensify in the weeks and months ahead. Talks of starting an infrastructure bank are an opening salvo from Obama – expect an acrimonious debate and more market volatility ahead. For those who continue to believe in the merits of fiscal austerity I would suggest listening to this 50 minutes lecture by Professor Paul Krugman delivered recently at Cambridge University to celebrate the 75th anniversary of the General Theory. To borrow an apt Sanskrit prayer from the Vedas: "tamaso maa jyotirgamaya" – "lead us from darkness to light"!