There's a surprising disconnect between the perceived brilliance of individual investors at large, well-known private equity firms and their actual net-to-LP returns, which are often no better than the market median. This violates the assumption that top talent automatically generates outlier results.

During due diligence, it's crucial to look beyond returns. Top allocators analyze a manager's decision-making process, not just the outcome. They penalize managers who were “right for the wrong reasons” (luck) and give credit to those who were “wrong for the right reasons” (good process, bad luck).

Some companies execute a 3-5 year plan and then revert to average returns. Others 'win by winning'—their success creates new opportunities and network effects, turning them into decade-long compounders that investors often sell too early.

In a world of highly skilled money managers, absolute skill becomes table stakes and luck plays a larger role in outcomes. According to Michael Mauboussin's "paradox of skill," an allocator's job is to identify managers whose *relative* skill—a specific, durable edge—still dominates results.

While Buffett's 22% annual returns are impressive, his fortune is primarily a result of starting at age 11 and continuing into his 90s. Had he followed a typical career timeline (age 25 to 65), his net worth would be millions, not billions, demonstrating that time is the most powerful force in compounding.

A crucial, yet unquantifiable, component of alpha is avoiding catastrophic losses. Jeff Aronson points to spending years analyzing companies his firm ultimately passed on. While this discipline doesn't appear as a positive return on a performance sheet, the act of rigorously saying "no" is a real, though invisible, driver of long-term success.

Timing is more critical than talent. An investor who beat the market by 5% annually from 1960-1980 made less than an investor who underperformed by 5% from 1980-2000. This illustrates how the macro environment and the starting point of an investment journey can have a far greater impact on absolute returns than individual stock-picking skill.

Investors rarely sell a fund for outperforming its benchmark too aggressively, but they should consider it. Research by Vanguard's John Bogle tracked the top 20 funds of each decade and found they almost always became significant underperformers in the following decade, demonstrating the danger of chasing past winners.

Even long-term winning funds will likely underperform their benchmarks in about half of all years. A Vanguard study of funds that beat the market over 15 years found 94% of them still underperformed in at least five of those years. This means selling based on a few years of poor returns is a flawed strategy.