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Michael Mauboussin Master Class — Moats, Skill, Luck, Decision Making and a Whole Lot More

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Oct 5, 2021

Guest

Michael J. Mauboussin

Michael Mauboussin, Head of Consilient Research at Counterpoint Global, shares his insights into the intricate dance between skill and luck in investing. He discusses the critical concept of expectations investing, urging listeners to adapt their strategies in a rapidly changing market. Mauboussin also highlights the importance of understanding intangible assets and critiques traditional valuation methods. Listeners can learn how mental models and decision-making quality define successful investors, as well as the evolving dynamics of venture capital.

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ANECDOTE

Mauboussin's Inspiration

Michael Mauboussin's work was heavily influenced by Al Rappaport's book, Creating Shareholder Value.
This led to their collaboration on Expectations Investing, published right before 9/11.

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INSIGHT

Expectations Investing

Stock prices reflect expectations about future performance, not just current value.
Analyze if these expectations are too high, too low, or just right to make investment decisions.

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ADVICE

Reverse Engineering Prices

Reverse-engineer market prices to understand implied assumptions.
Determine the probability of those assumptions being true to assess investment viability.

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The Evolution of Venture Capital and Tech Solutions

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Competitive strategy

Techniques for Analyzing Industries and Competitors

Michael Porter

This book by Michael E. Porter provides a detailed analysis of the competitive landscape by introducing the Five Forces framework: threat of new entrants, intensity of rivalry among existing competitors, pressure from substitute products, bargaining power of buyers, and bargaining power of suppliers. Porter also presents three generic strategies—cost leadership, differentiation, and focus—which help companies position themselves competitively. The book has been highly influential in shaping the discipline of competitor assessment and has been widely adopted by managers, analysts, and scholars worldwide.

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Expectations Investing

Reading Stock Prices for Better Returns

Michael J. Mauboussin

Alfred Rappaport

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Fooled by randomness

the hidden role of chance in life and in the markets

Nassim Nicholas Taleb

In 'Fooled by Randomness', Nassim Nicholas Taleb discusses the pervasive influence of chance and randomness in our lives and financial markets. The book argues that humans tend to underestimate the role of luck and overestimate the role of skill, leading to biases such as hindsight bias, survivorship bias, and the narrative fallacy. Taleb emphasizes the importance of recognizing and coping with uncertainty, and he critiques the tendency to seek deterministic explanations for random events. The book is part of Taleb's Incerto series, which also includes 'The Black Swan', 'The Bed of Procrustes', 'Antifragile', and 'Skin in the Game'.

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Security Analysis

Benjamin Graham

David L. Dodd

First published in 1934, Security Analysis is a seminal work in the field of finance that lays the intellectual foundation for value investing. The book, written by Benjamin Graham and David L. Dodd, distinguishes between investing and speculating, emphasizes the importance of thorough financial analysis, and introduces key concepts such as the 'margin of safety. ' The sixth edition includes commentary from leading Wall Street money managers and a foreword by Warren E. Buffett, who has praised the book for its enduring relevance in modern markets.

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Moneyball

The Art of Winning an Unfair Game

Michael Lewis

The book tells the story of the Oakland Athletics' 2002 season, where General Manager Billy Beane and his assistant Paul DePodesta used advanced statistical analysis, known as sabermetrics, to assemble a competitive team despite a limited budget. The approach, pioneered by Bill James, focused on metrics such as on-base percentage and slugging percentage rather than traditional measures like batting average and runs batted in. This data-driven strategy allowed the Athletics to compete with teams having much larger payrolls, like the New York Yankees, and achieve significant success, including a 20-game winning streak and a playoff appearance.

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The Innovator's Dilemma

When New Technologies Cause Great Firms to Fail

Clayton M. Christensen

In this influential business book, Clayton Christensen shows how even the most outstanding companies can lose market leadership when they fail to adapt to disruptive innovations. Christensen explains why companies often miss new waves of innovation and provides a set of rules for capitalizing on disruptive technologies. The book uses examples from various industries, including the disk drive, mechanical excavator, steel, and computer industries, to illustrate trends that lead to success or failure in the face of disruptive technologies.

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The success equation

Untangling Skill and Luck in Business, Sports, and Investing

Michael Mauboussin

In this book, Michael Mauboussin helps readers understand the interplay between skill and luck in achieving successes and failures. He provides a framework to analyze the relative importance of skill and luck, offering concrete suggestions for applying these insights to improve decision-making. The book covers various concepts such as the continuum of activities from pure luck to pure skill, the importance of sample size, and the use of tools like checklists to enhance performance. Mauboussin draws on examples from sports, business, and investing to illustrate his points, making the book a valuable resource for anyone seeking to make better decisions in both professional and personal life.

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Full House

The Spread of Excellence from Plato to Darwin

Stephen Jay Gould

In 'Full House', Stephen Jay Gould explores how misconceptions about statistics can lead to misunderstandings of trends in complex systems. He uses baseball and evolutionary biology to illustrate how focusing on averages or extreme values can distort our view of reality. Gould argues that evolution does not inherently drive towards complexity, but rather, complexity is one end of a distribution where most life remains simple, like bacteria.

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Understanding Michael Porter

Joan Magretta

Erik Synnestvedt

Don Hagen

This book provides a clear and accessible summary of Michael Porter's groundbreaking ideas on competition and strategy. Written with Porter's full cooperation, it corrects common misconceptions about his concepts, such as the importance of being unique rather than the best, and how strategy involves making deliberate trade-offs. The book offers practical examples and insights into applying Porter's frameworks to achieve competitive success.

We sit down with the one & only Michael Mauboussin to dive deep into his incredible body of work: untangling skill and luck, measuring moats, persistence of returns in venture capital, decision making and — particularly timely — expectations investing and how to think about valuations in the current 2021 market environment. (!!) Michael's work is maybe our most frequent carve out on Acquired, so we're pumped to finally have a chance to interview the man himself. Big thank you to Patrick O'Shaughnessy and Brent Beshore for introducing us all at Capital Camp this year!

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Links:

Michael's wonderful talk at Google: https://youtu.be/1JLfqBsX5Lc
The new revised edition of Expectations Investing: https://www.amazon.com/Expectations-Investing-Reading-Returns-Heilbrunn/dp/0231203047/
The Success Equation: https://www.amazon.com/The-Success-Equation-Untangling-Investing/dp/1422184234/
Measuring the Moat: https://research-doc.credit-suisse.com/docView?language=ENG&format=PDF&sourceid=csplusresearchcp&document_id=1066439791&serialid=4uA2wHojCvFKzqWfwIyDvkSN1pkXRpb43LvyclLcJsk%3D&cspId=null
Public to Private Equity: https://www.morganstanley.com/im/publication/insights/articles/articles_publictoprivateequityintheusalongtermlook_us.pdf

‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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