Forget skill - it's all about luck

MOST City hotshots are just lucky, overpaid fools, according to an options market guru, who tomorrow argues his case in the Cambridge Union debating chamber. Nassim Nicholas Taleb has turned on his City and Wall Street colleagues to paint the entire investment industry as one where randomness rules and the best-performing traders usually owe it all to chance rather than skill.

Taleb this week publishes his views in Fooled By Randomness, an iconoclastic tour de force in which he argues people constantly delude themselves because they do not understand probability and are programmed to find reasons where none exist.

He draws on the thinking of philosophers such as Karl Popper and the Ancient Greek legislator Solon to reason that track record counts for little.

Given an infinite number of monkeys sat in front of typewriters, one of them would eventually tap out an exact version of The Iliad, he points out. 'But would anyone bet their life savings on that monkey writing The Odyssey next? '

Survivorship bias - the fact that only the winning companies, sectors and asset classes are left to be counted when analysts come to weigh up history - flatters performance returns and persuades people to make bad investment decisions.

Investment advisers today point to the spectacular long-term returns produced by the US stock market. They conveniently forget all the other asset classes which an investor might have put his money in 50 years ago.

Taleb's grandfather lost money in Lebanese government bonds and his great-grandfather in 1930s Argentine real estate. A self-styled intellectual, openly contemptuous of nine-to-five wage slaves, Taleb worked at Bankers Trust in London and Credit Suisse First Boston in New York before setting up his own Connecticut- based derivatives investment boutique Empirica.

He describes his own hedge fund, Kurtosis - meaning sad tales - as a hedge against other hedges because it effectively takes bets on improbable events.

Unlike most hedge funds, designed to make tiny incremental amounts of money most days, Kurtosis loses small amounts most days and cleans up maybe three or four times a year.

'Most days are painful. It's like losing a bit of skin every day, ' says Taleb, a self-confessed-health fanatic, who refuses to reveal his age.

He loathes the modern media, especially 'fatuous' journalists who unquestioningly admire billionaires and come up with spurious reasons for tiny financial market movements.

Nothing escapes his Exocets, from the specious statistical arguments of OJ Simpson's defence lawyer to the arrogance of the Nobel Prizewinning economists behind collapsed hedge fund Long-Term Capital Management.

But he is a fan of George Soros, because of his willingness to plead ignorance, and even admits fellow investor Warren Buffett may not be without some ability.

He is not without his own unscientific prejudices. Good traders tend to be ugly, sloppily dressed and more interested in the contents of a garbage can than a Cézanne, he says.