Michael Mauboussin Master Class — Moats, Skill, Luck, Decision Making and a Whole Lot More
Oct 5, 2021
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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.
Viewing early-stage investments as options can provide a useful framework to assess potential value and optionality.
Analyzing industries and businesses as complex adaptive systems can offer valuable insights into future prospects.
Understanding reflexivity and its influence on valuations and decision-making is crucial in high-expectation market environments.
Incorporating diverse perspectives and techniques like base rates, pre-mortems, red teaming, and journaling can enhance decision-making skills.
Deep dives
Using options theory to analyze early-stage investments
When considering early-stage investments, it can be helpful to view them as options rather than traditional assets. Options theory, which has been around for a while, allows investors to capture the potential upside of an investment while limiting downside risk. This framework is particularly relevant for early-stage companies where the future is uncertain and the potential for extreme outcomes exists. By viewing these investments as options, investors can focus on the potential value and optionality of the investment rather than traditional valuation metrics.
Understanding complexity and adaptive systems
Complexity and adaptive systems play a crucial role in analyzing and understanding the dynamics of industries and businesses. These systems involve the interactions of multiple agents that learn, adapt, and shape their behavior in response to changing environments. Early-stage companies, in particular, exhibit characteristics of complex adaptive systems. It is essential to recognize the evolutionary nature of these systems and approach analysis with a probabilistic mindset. Additionally, understanding industry dynamics, entry and exit patterns, and the sources of competitive advantage can provide valuable insights into the future prospects of a company.
Applying reflexivity to valuation and decision-making
Reflexivity, as coined by George Soros, is a concept that highlights the interaction between observers and the observed entity, be it a company or a market. This interplay between perception and reality can have a profound impact on valuations and decision-making. Understanding reflexivity is particularly relevant in scenarios like the current market landscape, where valuations are stretched and expectations are high. By recognizing the influence of reflexivity, investors can assess the potential for market-driven shifts and be mindful of their decision-making processes.
Embracing open-mindedness and feedback
To enhance decision-making, it is crucial to remain open-minded and seek feedback from various sources. Incorporating diverse perspectives through techniques like base rates, pre-mortems, red teaming, and journaling can help challenge assumptions and promote critical thinking. Base rates provide insights from past instances in similar contexts, enabling a broader understanding of potential outcomes. Pre-mortems involve projecting into the future and imagining negative scenarios to identify potential pitfalls. Red teaming involves actively seeking opposing viewpoints to counter confirmation bias. Journaling facilitates self-reflection and provides a means to give oneself honest feedback for growth and improvement.
Keeping a Decision Log and Honest Feedback
One key insight from the podcast is the importance of keeping a decision log and reviewing it periodically. By documenting decisions and the information available at the time, individuals can gain a better understanding of their decision-making process. The goal is to provide honest feedback to oneself and approach decision making probabilistically. This practice can be helpful in improving decision-making skills without requiring significant additional effort.
The Paradox of Skill
Another main idea discussed in the podcast is the paradox of skill. As skill levels increase, luck becomes more influential in determining outcomes, especially in activities where both skill and luck contribute. The podcast highlights that relative skill gaps have narrowed over time, making it difficult to differentiate oneself from the competition. This concept applies to various domains, including investing and professional sports.
The Impact of Changing Market Dynamics
The podcast touches on the changing dynamics of the market and how it has transformed over the past two decades. It highlights the rise of technology companies and the significant valuation growth they have experienced. The discussion raises questions about the possibility of future market leaders and the role of factors such as declining interest rates, credit spreads, and the emergence of decentralized finance and cryptocurrencies. The evolving landscape suggests that future market leaders may include companies yet to be founded or publicly listed.
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!
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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