QUALIPORT
Luck Isn't Skill

By Bruce Jackson (TMFGoogly)
January 25, 2001

Don't mistake luck for skill. It can lead to extreme arrogance.

The Qualiport has had a less than auspicious life since it was born in December 1997. In just over two years since January 1999, it has actually lost money, being down about 9%. In that same period, the FTSE 100 has risen by just over 6% -- not auspicious itself, but at least it's not in negative territory. Life wasn't meant to be easy. Nor is individual stock picking, as the Qualiport is clearly showing.

But every cloud has a silver lining. My glass is always half full rather than half empty. I don't cry over spilt milk. I'm an optimist. You can't change the past, so don't worry about it. But you can look back into the past and use it as a learning tool. The past also helps mould the future.

Skill vs Luck

Back to the first sentence of this article. "Don't mistake luck for skill. It can lead to extreme arrogance." I don't consider myself an arrogant person. When it comes to stock picking, I also don't consider myself to be arrogant. If there was any arrogance, the past performance of the Qualiport has certainly knocked it out of me.

Consider a different scenario. Let's say the Qualiport had bought ARM Holdings (LSE: ARM) back in the early part of 1998 at 50p – it was about that time that it was first suggested as a Qualiport company on the discussion board. With the shares standing today at 550p, we'd have been sitting on a 1000% profit and the Qualiport would be well in the black and trouncing the market.

While that sort of performance would have been great, there would have been a great danger that we mistook that great investment for skill. It would instead have been complete luck. At the time, I didn't know anything about ARM Holdings. I didn't know what its competitive advantage was. It was a small (but fast-growing) loss-making company, making it very difficult, if not impossible, to value. Earnings were unpredictable. In all, not a Qualiport share, and back then certainly not a company I'd feel comfortable investing in.

Missed Opportunity

I don't look back in anger at a potential missed opportunity. If another ARM situation came up, I'd again pass on the opportunity to invest in what may turn out to be a great company. I think it was Warren Buffett who said it's better to be certain of a good result than hopeful of a great one. For every ARM out there, there are a hundred ARM fakes. I don't fancy my chances of picking a 100/1 winner at the races when I might be wagering £1, so why would I try and do it when stock picking, and with significantly more money than £1 at stake?

I'd be lying if I didn't say I'd love to be sitting on a 1000% gain on ARM Holdings. A £2000 investment, which was about our average initial investment back in 1998, would now be worth £22,000. (That's presuming we made no sales of our holding, which would have been unlikely given that at times ARM would have made up well over 60% of the total portfolio.) Despite that, I consider myself a better investor because I DIDN'T buy shares in ARM at 50p.

Success often breeds success. But it also breeds arrogance. Flushed by ARM's success, there would have been a great danger in me mistaking that luck for skill. More than likely, I would have then started looking for the next ARM. The odds of me finding it would have been about 100/1. When you're playing against those sorts of odds, there's only ever one winner, and it's not you!

The Qualiport's mediocre (to say the least!) performance has knocked any signs of arrogance out of us. As investors, that's the best thing that could have happened to us. Every cloud does have a silver lining.

Footnote: For those people who bought ARM at 50p (or 100p or even 200p) for the right reasons – because they knew the company, the management, the products and the potential – well done! Your success was down to skill, not luck. Enjoy it!

Qualiport News

Our smallest holding, Dell Computer Corporation (Nasdaq: DELL), released a profit warning on Monday. It was hardly unexpected, as just about every other company with exposure to the personal computer (PC) market had already warned about an extremely soft last quarter of 2000.

Guess what happened to the shares? They've gone up! Go figure. In a tough market, Dell is slashing prices in order to gain market share. Due to its low cost model, it can afford to do that while remaining profitable. It can tough this out. Its competitors can't. Something has to give. When it does, PC prices will rise again, and Dell with its (by that time) dominant market position, will be the beneficiary. That's the theory anyway, and that's why the share price is rising. Dell makes up about 5% of the Qualiport, so is a relatively insignificant holding. Who knows – if the share price gets too far ahead of itself we may even consider selling. That decision rests with Maynard.

PizzaExpress (LSE: PIZ) reports interim results on February 5th. Has anyone else noticed its recent share price movements? We're pleased, having recently topped up our holding at 645p. But we're not arrogant!

Where Next?

Are you an arrogant stock picker? Let us know on the Qualiport discussion board.
Fool.com coverage of the Dell profit warning.