Set forth below is the text of an answer that I posted to a question (How Does One Know Whether They Are a Good Investor Or Just Got Lucky?” posed at the Quora site:
This is a super question. The answer gets at the reason why so many humans (including most of the Big Shot “experts”) FAIL at stock investing.
With most endeavors, we look for feedback to determine whether we are going about things properly or not. If you do not know how to drive and yet still try to do it, you are soon going to receive some harsh feedback telling you that you need to enroll in driving school. It’s the same with cooking dinner or with hitting a baseball or with going on a date. With most activities, when you are doing things right, you obtain good results, and, when you are doing things wrong, you obtain poor results.
It does not work this way with stock investing. There is now 32 years of peer-reviewed academic research showing this.
There are a small number of investors (Value Investors — 20 percent of the population at most) who apply genuine skill to the task of stock investing and obtain good returns as a result. The rest are fooling themselves (according to the research). Nothing they do or fail to do makes much of a difference. For 80 percent of stock investors, there is one factor that determines whether they obtain good results or not and it is a factor to which they pay close to zero attention.
That factor is the valuation level that applies when the stock purchase is made.
There are long stretches of time in which it is almost impossible to fail as a stock investor. We were in one of those stretches from 1982 through 2000. There are other long stretches of time in which it is almost impossible to succeed. We have been in one of those stretches from 2000 forward. The difference is that in 1982 stocks were selling at one of the lowest prices at which they have ever sold. And in 2000 they were selling at what was BY FAR the highest price they have ever sold.
Stocks ALWAYS provide amazing long-term returns when they are selling at low or fair prices. There has never once been an exception in 140 years of stock market history. Stocks ALWAYS provide horrible long-term returns when they are selling at high prices. Again, there has never been one exception in 140 years of stock market history.
If you look at valuations when setting your stock allocation, you are a good investor. That one factor is 80 percent of the game. Do that and you can’t lose. Fail to do that and you can’t win. All the rest that people talk about will have only a relatively small effect.
All investors who do not take valuations into consideration and yet appear to be doing well just got lucky. But only for a time! To buy stocks at a high price and then do well means to end up owning not just overpriced stocks but insanely overpriced stocks. Those “lucky” investors end up losing all the gains that they enjoyed for a time.
Luck doesn’t matter much in the long term. What matters in the long term is whether you pay attention to price when setting your allocation or not.
The tricky part is that it can take decades for this eternal truth to reveal itself once again. Paying attention to valuations does not help you gain good one-year or two-year or three-year results. Valuations only help you in the long term (time-periods of ten years and longer).
So you cannot go by personal experience or what your friends tell you or what is written in magazines or on web sites. You MUST look at the entire 140 years of stock market history to see how this eternal truth reveals itself over and over again. It’s only peer-reviewed academic research that provides feedback worth listening to in this field.