Originally Posted by TromboneAl
Let's say you have seven people who have done extremely well timing the market. How can you tell, objectively, that they weren't just lucky?
That is, how do you know that they weren't just the seven monkeys who happened to throw their darts in the right place?
We used to count the number of mutual fund managers and then figure out how many years it'd take for a coin-flipper (exceed the benchmark or lag it) to rise to the top. If there are 16,000 fund managers then a lucky coin-flipper would take 14 years (2 to the 14th power) to beat out his contemporaries. If he did it on the 15th then he'd be skilled, not lucky.
From that has risen a general perception that if an investor can beat the market (whatever the benchmark is) for 20 years then they're no longer a coin-flipper. 2^^20 is only a million, though, so I guess being truly unique on the planet and skilled would require about 33 years (1 out of 8.5 billion).
But I'm not a statistician. Anyone have a better explanation?