The Costly Mistake of Misjudging Luck from Skill

Separating skill from luck: The importance of sample size and time

All trading results are a combination of skill and luck, but decomposing the outcome into these two categories isn’t easy. It’s impossible if the sample size is too small. By placing too much emphasis on recent returns, investors are at risk of allocating money to unskilled lucky traders while disregarding skilled but temporarily unlucky traders. This is a costly mistake.

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