#203 Michael Mauboussin – Episode Notes

 

https://www.youtube.com/watch?v=J7xEQdzWE_M&t=1s

Michael is the author of The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, Think Twice: Harnessing the Power of Counterintuition, and More Than You Know: Finding Financial Wisdom in Unconventional Places. Michael is currently Head of Consilient Research at Counterpoint Global.

Michael has also held roles as Director of Research at BlueMountain Capital Management, he was a Managing Director and Head of Global Financial Strategies at Credit Suisse, and he was Chief Investment Strategist at Legg Mason Capital Management. 

Mr. Mauboussin has been an adjunct professor of finance at Columbia Business School since 1993 and currently is Chairman of the Board of Trustees for the Sante Fe Institute.

Episode Transcript

Michael’s Books

The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing 

More Than You Know: Finding Financial Wisdom in Unconventional Places

Think Twice: Harnessing the Power of Counterintuition

Michael’s Investing Essay’s

---

05:55 Leadership in Sports and Leadership in Business

Mauboussin brings up The Captain Class by Sam Walker (Listen to Walker’s Episode here)

• The leader on a sports team isn’t always the best player on the team, but they’ll do anything it takes to succeed
  • They communicate well and are authentic
  • “Whenever you emerge as a leader, you want them to be authentic and to do it in a way that’s consistent with their own personality.”
• It is easy to try and get sidetracked when you become a leader and fit inside a mold, but Mauboussin believes it is best to remain yourself

13:25 Mauboussin’s Thinking Process

Mauboussin has had three things that help with his process when it comes to thinking through business decisions

• Being Able to Allocate Time to Thinking
  • There’s a difference between just doing things and then allocating time to think through decisions and study up on it before acting
• Writing
  • Sitting down and writing helps greatly with thinking about what you’re doing and what next steps need to be taken
    • Mauboussin had a line editor for one of his books that helped him realize what mistakes were being made and how he can improve himself
    • “Going through his edits was one of the most difficult weeks I’ve ever had professionally, but incredibly valuable in terms of understanding how to communicate more clearly.”
• Teaching
  • “It’s one thing to think you know what something means or how to do something. It’s a very different thing to communicate and get that into the mind of another.”
    • Teaching is all about discipline

16:10 Reading Helped Shape Mauboussin’s Path

Mauboussin had an epiphany during his finance training program

• A colleague gave him Al Rappaport’s Creating Shareholder Value and everything about it was brand new to Mauboussin with being a humanities major
  • The book helped give him clarity and go forward into this world of business
  • Rappaport has become a close friend of Mauboussin and has helped him build frameworks that he did not necessarily have from his upbringing
• If you want to improve your writing and thinking, Mauboussin believes the key is reading 
  • “When you read a lot, you start to realize the kinds of language that resonates with you. Who writes clearly? Who gets ideas into your mind? What is memorable to you?”
    • Two people Mauboussin views as clear writers is Michael Lewis and Matt Levine

19:55 Exploration and Synthesis

Mauboussin keeps a running list of ideas so he can keep his available writing content fresh

• “It can feel like an endless journey.”
• That’s why Mauboussin enjoys being in business and markets because you “never leave the game. There’s always something new, some new development.”
  • Mauboussin just follows where his curiosity takes him when it comes to exploration

A lot of the work Counterpoint Global does, Mauboussin refers to as synthesis 

• “[We’re] really trying to garner the best ideas or thoughts on a particular topic and bring them together in a way that hopefully allows us and some other people, to have insight into how it works.”

For when Mauboussin is unsure on something and wants to learn more, he creates a plan based on research

• Mauboussin reads as much as he can on the topic he’s interested in 
  • Take notes, make an outline, and try to understand as much as possible in that first phase
  • Exercise, long walks, periods of time to clear your head also allows for time to think and process information

28:30 Feedback Loops

Feedback has been integral to Mauboussin growing and learning along his career path

The quality of feedback is also very different within different scenarios 

• “When your activity is largely skill-based, growing up playing the piano, [being] a tennis player, a teacher can really observe you and give you very pointed feedback that can be helpful.”
• For Mauboussin, he believes there is a lot more luck when it comes to assessing your skills when you add in randomness, like working in markets and investing

When he is working in the classroom, that’s where Mauboussin sees the most feedback for himself

• Between visual cues and questions, Mauboussin knows how to fine-tune his presentations to hit home

31:25 The Work that Goes into Mauboussin’s Presentations

In the mid 1990’s, Mauboussin went to the Buckley School of Public Speaking in Camden, South Carolina and attended  a two and a half day training session on public speaking 

• With Mauboussin naturally being an introvert, this helped him adjust into a new role of public speaking 
• “The Buckley experience wasn’t just a one-off. It was very useful from the very beginning and integrating that stuff has been very helpful.”

Preparation is also vital to having a successful message within a presentation

• “When you say ‘one hour presentation,’ what you’ve probably seen is after a bunch of practice and having done it, [you’ve] refined it.”
• Even for a 3-minute presentation, Mauboussin might spend an hour or longer refining it to ensure his message is always going to be clear and concise 

These presentations are also a great way to create feedback loops, whether for Mauboussin himself or for the presentations he listens to 

• “I like to listen to other people and see what works. Maybe it’s idiosyncratic like what works for me, but who is a good speaker? Who is clear? Who is compelling?”

41:25 The Power in Financial Behavior Classes

Mauboussin used to recommend for his students to take negotiation classes when it was not readily available to take financial behavior classes

• “What’s powerful about negotiation is, and what is a valuable part of life, is understanding the other person’s point of view.”

It’s almost important to note that there’s a lot more questions than answers in finance

• Things that are not always fully understood include:
  • Market Efficiency and Inefficiency: what makes prices “correct”?
  • What is the concept of risk?

48:00 Finding an Edge Among Behavioral Mistakes

Mauboussin worked on a piece on market inefficiencies that looked at analytical, informational, technical and behavioral issues

• Analytical: Same information but analyzed differently between people
• Informational: Knowledge you have but others do not
• Technical: Decisions made regardless of preferences
• Behavioral: Boils down to people are people and even with knowledge on behavioral issues, they will make similar decisions
  • Ben Graham had the idea of “Mr. Market” and he “anthropomorphized this concept of markets as people and bring in these different kinds of moods.”

51:40 Mauboussin and Behavioral Biases

After attending a Harvard class, Investment Decisions in Behavior Finance hosted by Richard Zeckhauser and Arnold Wood, and went through the Overconfidence Test and Two-Thirds View

• Mauboussin won both of those experiments 
  • Had taken those tests before and failed them, but learned from those mistakes to be able to succeed again in the future

Other Behavioral Biases:

• Confirmation Bias: “Once you’ve made a decision about something, you tend to seek information that confirms your view and dismiss valid information that doesn’t confirm your view.”
  • Counter this with active open-mindedness 
• Overconfidence: “You don’t want to be overconfident, you don’t want to be under-confident, you just want to be well calibrated, if possible.”
  • Feedback is a great way to solve issues of confidence
  • Set up personal markers to analyze this

59:10 Santa Fe Institute

The Santa Fe Institute was founded in the 1980s by scientists who believed the academic world had become very siloed 

• “It was founded to essentially bring together scientists to understand vexing problems.”
• Unifying theme is understanding complex systems
  • What emerges from these, in the various fields they study, is global systems
• “It’s incredibly intellectually intoxicating because it is self-selected from scientists and people who are open minded.”
  • Most of the scientists out there are imminent in their own field and very open to different fields

Mauboussin is now Chairman of the Board of Trustees and has been for the last seven years

01:02:40 Mauboussin’s Projects and Interests

One piece Mauboussin is working on is a multi decade look at the evolution of public markets and equities and private markets and equities

• Working with past podcast guest, W. Brian Arthur

Mauboussin’s other interest is in slow moving trends that accumulate to be very profound over time

• Companies used to invest primarily in physical assets and have increasingly switched to intangible assets
  • Those show up in financial reports differently, and it’s not distortion, but it’s interesting to see how companies view those assets
  • “The way people have to think about economic value, from the financial statements, has evolved in the last 30-40 years in such a way that it compels people to think about things more progressively.” 

Explore vs. Exploit

• “As a business you think about exploitation as ‘doing more of what we do now,’ which is fine, but exploration is trying to go out and find the next big thing.”
  • Mauboussin finds it interesting from a resource point of view as how much should be allocated to exploitation and how much should be allocated to exploration

Michaels’ Recommended Reading List – March 2020

Investment Classics
Bernstein, Peter, Against the Gods: The Remarkable Story of Risk (New York: John Wiley & Sons, 1996).
Capital Ideas: The Improbable Origins of Modern Wall Street (New York: The Free Press, 1992).
Bevelin, Peter, Seeking Wisdom: From Darwin to Munger – Third Edition (Malmö, Sweden: Post Scriptum AB,
2007).
Fisher, Philip A., Common Stocks and Uncommon Profits (New York: John Wiley & Sons, 1996).
Graham, Benjamin, The Intelligent Investor: A Book of Practical Counsel (New York: HarperBusiness, 1985).
Graham, Benjamin, and David L. Dodd, Security Analysis – Sixth Edition (New York, McGraw-Hill, 2008).
Kaufman, Peter D., ed., Poor Charlie’s Almanack– Third Edition (Marceline, MO: The Walsworth Publishing
Company, 2005).
Keynes, John Maynard, The General Theory of Employment (New York: Harcourt, Brace and Company, 1936).
Malkiel, Burton G., A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing –
Completely Revised and Updated (New York: W. W. Norton & Company, 2020).
Marks, Howard, The Most Important Thing: Uncommon Sense for the Thoughtful Investor (New York: Columbia
Business School Publishing, 2011).
Siegel, Jeremy J., Stocks for the Long Run – Fifth Edition (New York: McGraw-Hill, 2014).
Smith, Adam, The Money Game (New York: Vintage, 1976).
Williams, John Burr, Theory of Investment Value (Cambridge, MA: Harvard University Press, 1938).
Everything by Warren Buffett www.berkshirehathaway.com.

Economics and Finance
Arrow, Kenneth J., The Economics of Information (Cambridge, MA: Harvard University Press, 1984).
Arthur, W. Brian, Increasing Returns and Path Dependence in the Economy (Ann Arbor, MI: University of
Michigan Press, 1994).
Brealey, Richard A., Stewart C. Myers, and Franklin Allen, The Principles of Corporate Finance – Thirteenth
Edition (New York: McGraw-Hill/Irwin, 2019).
Damodaran, Aswath, Investment Valuation: Tools and Techniques for Determining the Value of Any Asset – Third
Edition (Hoboken, NJ: John Wiley & Sons, 2012).
Friedman, Milton, Essays in Positive Economics (Chicago: The University of Chicago Press, 1953).
Koller, Tim, Mark Goedhart, and David Wessels, Valuation: Measuring and Managing the Value of Companies –
Seventh Edition (Hoboken, NJ: John Wiley & Sons, 2020).
Rappaport, Alfred, Creating Shareholder Value: A Guide for Managers and Investors (New York: The Free Press,
1997).
Rappaport, Alfred, and Michael J. Mauboussin, Expectations Investing: Reading Stock Prices for Better Returns
(Boston, MA: Harvard Business School Press, 2001).
Reinhart, Carmen M., and Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly (Princeton,
NJ: Princeton University Press, 2009).
Stewart, G. Bennett III, The Quest for Value (New York: Harper-Collins Business, 1991).

Psychology
Ariely, Dan, Predictably Irrational: The Hidden Forces That Shape Our Decisions (New York: HarperCollins, 2008).
Bazerman, Max H. and Don Moore, Judgment in Managerial Decision Making – Seventh Edition (Hoboken, NJ: John Wiley & Sons, 2008).
Catmull, Ed, Creativity, Inc.: Overcoming the Unseen Forces that Stand in the Way of True Inspiration (New York: Random House, 2014).
Chabris, Christopher and Daniel Simons, The Invisible Gorilla: How Our Intuitions Deceive Us (New York: Crown Publishers, 2010).
Cialdini, Robert B., Influence: The Psychology of Persuasion (New York: Quill, 1993).
Csikszentmihalyi, Mihaly, Creativity: Flow and the Psychology of Discovery and Invention (New York: Harper
Collins, 1996).
Damasio, Antonio R., Descartes’ Error: Emotion, Reason, and the Human Brain (New York: Avon Books, 1994).
Gigerenzer, Gerd, Calculated Risks (New York: Simon & Schuster, 2002).

Gilbert, Daniel, Stumbling on Happiness (New York: Alfred A. Knopf, 2006).
Gilovich, Thomas, Dale Griffin, and Daniel Kahneman, eds., Heuristics and Biases: The Psychology of Intuitive
Judgment (Cambridge: Cambridge University Press, 2002).
Grant, Adam, Give and Take: Why Helping Others Drives Our Success (New York: Viking, 2013).
Kahneman, Daniel, Thinking, Fast and Slow (New York: Farrar, Straus and Giroux, 2011).
Kahneman, Daniel, Paul Slovic, and Amos Tversky, Judgment Under Uncertainty: Heuristics and Biases
(Cambridge, UK: Cambridge University Press, 1982).
Lewis, Michael, The Undoing Project: A Friendship that Changed Our Minds (New York: W.W. Norton &
Company, 2016).
Myers, David G., Intuition: Its Power and Perils (New Haven, CT: Yale University Press, 2002).
Russo, J. Edward, and Paul J. H. Schoemaker, Winning Decisions: Getting It Right the First Time (New York:
Doubleday, 2002).
Shleifer, Andrei, Inefficient Markets: An Introduction to Behavioral Finance (New York: Oxford University Press,
2000).
Silver, Nate, The Signal and the Noise: Why So Many Predictions Fail—But Some Don’t (New York: The Penguin
Press, 2012).
Stanovich, Keith E., What Intelligence Tests Miss: The Psychology of Rational Thought (New Haven, CT: Yale
University Press, 2009)
Taleb, Nassim Nicholas, Fooled by Randomness (New York: Texere, 2001).
, The Black Swan: The Impact of the Highly Improbable (New York: Random House, 2007).

Antifragile: Things that Gain from Disorder (New York: Random House, 2012).

Tetlock, Philip E., and Dan Gardner, Superforecasting: The Art and Science of Prediction (New York: Crown
Publishers, 2015).

Thaler, Richard H., The Winner’s Curse (Princeton, NJ: The Princeton University Press, 1994).
, Misbehaving: The Making of Behavioral Economics (New York: W.W. Norton & Co, 2015).

Thaler, Richard H., and Cass R. Sunstein, Nudge (New Haven, CT: Yale University Press, 2008).

Zimbardo, Philip, The Lucifer Effect: Understanding How Good People Turn Evil (New York: Random House, 2007).

Strategy

Axelrod, Robert, The Evolution of Cooperation (New York: Basic Books, 1984).

Besanko, David, David Dranove, Mark Shanley, and, Scott Schaeffer Economics of Strategy – Sixth Edition (Hoboken, NJ: John Wiley & Sons, 2012).

Christensen, Clayton M., Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Boston, MA: Harvard Business School Press, 1997).

Dixit, Avinash K., and Barry J. Nalebuff, The Art of Strategy: A Game Theorist’s Guide to Success in Business and Life (New York: W.W. Norton & Company, 2008).

Ghemawat, Pankaj, Strategy and the Business Landscape – Third Edition (New York: Prentice Hall, 2009).

Greenwald, Bruce and Judd Kahn, Competition Demystified (New York: Portfolio, 2005)

Magretta, Joan, Understanding Michael Porter: The Essential Guide to Competition and Strategy (Boston, MA: Harvard Business Review Press, 2011).

McTaggart, James, Peter Kontes, and Michael Mankins, The Value Imperative: Managing for Superior Shareholder Returns (New York: The Free Press, 1994).

Porter, Michael E., Competitive Advantage: Creating and Sustaining Superior Performance (New York: Simon & Schuster, 1985).

Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: The Free Press,1980).

Reichfield, Frederick F., The Loyalty Effect (Boston, MA: Harvard Business School Press, 1996).

Rogers, Everett M., Diffusion of Innovations (New York: The Free Press, 1995).

Rosenzweig, Phil, The Halo Effect . . . and Eight Other Business Delusions that Deceive Managers (New York:Free Press, 2006).

Shapiro, Carl, and Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy (Boston, MA: Harvard Business School Press, 1999).

Slywotzky, Adrian J., David J. Morrison, and Bob Andelman, The Profit Zone: How Strategic Business Design will Lead you to Tomorrow’s Profits (New York: Three Rivers Press, 2002).

Utterback, James M., Mastering the Dynamics of Innovation (Boston, MA: Harvard Business School Press, 1996).