Mitchell cites a series of examples to support his views:

1983 was a very difficult year for most traders. One trader had an outstanding year mainly because he sold soya beans short, right at the top of a big bull market. He made huge profits in the subsequent price decline. His 50 per cent year was the result, not of his skill per se, but of one event—having picked the top of a major bull market. He never repeated this first-class performance and subsequently faded away.

Favourable Market Selection

A trend-following trading advisor aggressively trades the 10 year Japanese bond. Our studies of this market show that for the last five years, it has been very easy to trade using trend-following techniques. So easy, in fact, that large profits have been virtually unavoidable. I estimate that trading this market has added something on the order of 15 to 20 per cent per year to the advisor’s performance. The decision to aggressively trade this market was made several years ago, with little information to support it. This has been a successful decision, but probably with more luck than skill.

The Stop that Just Happened to be Right for a Major Event

European currencies, and particularly the D-mark, sold off sharply during the Russian coup attempt in August 1991. Most systematic traders were stopped out of their long positions and many reversed to being short. The coup failed and the currency markets rapidly recovered. Most systematic traders had major losses. A few lucky traders had stops in just the right place and stayed long. This was the winning strategy this time. (Had the coup succeeded, the currency collapse would probably have continued and reversed the above outcome.)

Lucky Decisions Made for Non-investment Reasons

A discretionary trader may take a vacation and miss some very good or very bad markets. A trader may have decided to trade foreign interest rate markets, just before the huge price moves we have had over the last few years.

The Small Trader Effect

A trader may be successful mainly because he uses strategies which are not viable with larger amounts of equity. His track record could be based on thinly traded options and futures markets. Future investors may not be so lucky.

The Key Event Effect

There may be very few events which affect trading performance; the fewer the events, the easier it is to be lucky or unlucky. The stock-market is a good example. A “buy and hold” trader in US stocks only needed to have predicted the 1982 bottom and the 1987 peak to generate an outstanding 12 year track record.

The Lottery Effect—Someone Has to Win

Each year the managed futures industry attracts huge numbers of aspiring but unknown traders. Those with good performance report their data to the public. The failures are never seen. This sets up conditions where investors can easily mistake good luck for superior skill.

To illustrate, suppose 4000 aspirants begin trading funds this year, and market conditions are fairly difficult. We can reasonably expect, say, 5 per cent of these to have at least minimal trading skills and enough good luck to produce attractive performance. By the end of the first year, we will have 200 apparent stars, and a few genuine ones. The remaining 3800 traders will have failed. After another fairly difficult year, given our probability factor of 5 per cent, we can expect a group of 10 to have continued good luck and good performance. Thus, two years of “stellar” performance can easily be due to luck.

In the third year, another phenomenon might occur —good luck for a whole group. Markets could be so favorable for certain trading styles that good performance almost cannot be avoided. For example, trend-followers almost couldn’t fail to be very profitable in 1987, or in the late 1970s and early 1980s. Thus, it is quite possible for traders with minimal skills to generate excellent multi-year track records.

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