A few weeks ago I wrote a column for the Globe and Mail discussing whether Warren Buffett was a genius, or just lucky. He’s been described as a five-sigma event, meaning that his performance falls within five standard deviations from the average. To put it into context, NBA player Manute Bol stood at 7’7″ and this put him at 10 standard deviations from the average height for an American male. Clearly height is not something you can manipulate easily so it demonstrates that, while rare, extreme data points can occur by chance. Warren Buffett’s performance record would be the equivalent of a 6’9” male, rare but not unimaginable. You can read the original column here.
One of the concerns I had with this analogy is that investing performance probably does not follow a normal distribution. Gilles Gignac provides some more in-depth analysis at his stats blog. His analysis would strongly suggest that Buffett’s performance is indeed due to skill. Thanks Gilles, interesting read.