torsdagen den 3:e maj 2012

Michael J. Mauboussin

Michael J. Mauboussin arbetar på Legg Mason Capital Management  och Columbia Business School, fakulteten för Heilbrunn Center for Graham and Dodd Investing, samt anses vara en av världens främsta inom s.k. behavioural finance. Han är också författare till; More Than You Know som jag starkt kan rekommendera samt Think Twice. Mauboussin är också, tillsammans med Alfred Rappaport och Peter L. Bernstein, medförfattare till boken Expectations Investing.

Mauboussin har en hel del intressant att delge. Nedan följer en aptitretare där han redogör för sin syn på vad som behövs för att lyckas som investerare.

"Here are some thoughts on what makes for a good investment process, or skill in the investment industry. This discussion applies directly to long-term investors, but many of the concepts apply to any type of investment approach. You can think of skill in different parts.

The first part requires you to find situations where you have an analytical edge and to allocate the appropriate amount of capital when you do have an edge. The financial community dedicates substantial resources into trying to gain an edge but less time on sizing positions so as to maximize long-term wealth.

At the core of an analytical edge is an ability to systematically distinguish between fundamentals and expectations. Fundamentals are a well thought out distribution of outcomes, and expectations are what is priced into an asset. 

An analytical edge exhibits certain characteristics. For example, assessment of the fundamentals should be consistent with the principles of economics, especially microeconomics. Investors need to grasp notions like supply and demand, economic profits, and sustainable competitive advantage. An edge should also incorporate the outside view rather than relying on the inside view. With the inside view, decision makers tend to gather information about a topic, combine it with their own inputs, and project into the future. In most cases, the inside view leads to conclusions that are to optimistic. By contrast, the outside view asks what happened whenothers were in a similar situation before. By leaning more on historical base rates than on individual extrapolation, the outside view provides a better grounding for analysis.

Edge also implies what Ben Graham, the father of security analysis, called a margin of safety. You have a margin of safety when you buy an asset at a price that is substantially less than its value. As Graham noted, the margin of safety “is available for absorbing the effect of miscalculations or worse than average luck.” The size of the gap between expectations and fundamentals dictates the magnitude of the margin of safety. Graham expands, “The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price.

The second challenge is to properly build portfolios to take advantage of the opportunities. There are two common mistakes in sizing positions within a portfolio. One is a failure to adjust position sizes for the attractiveness of the opportunity.

While this is difficult in practice for most money managers, the main idea remains: the best ideas deserve the most capital. The weighting in many portfolios fails to distinguish sufficiently between the quality of the ideas. The other mistake, at the opposite end of the spectrum, is overbetting. In the past, funds that have seen their edge dwindle have boosted returns through leverage. This led to position sizes that were too large for the opportunity and ultimately disastrous in cases when the trade didn’t perform as expected. The failure of Long-Term Capital Management is one of the bestdocumented cases of the perils of overbetting.

The analytical part of a good process requires both disciplined unearthing of edge and intelligent position sizing aimed at maximizing long-term risk-adjusted returns.

The second part of skill is psychological, or behavioral. Not everyone has a temperament that is well suited to investing, and skillful investors approach markets with equanimity. One such skilled investor is Seth Klarman, founder and president of the highly-successful Baupost Group, who shared a wonderful line: “Value investing is at its core the marriage of a contrarian streak and a

The first part of Klarman’s line emphasizes the importance of the willingness to go against the crowd. Academic research confirms what most people know: it is easier and more comfortable to be part of the crowd than it is to be alone. Skillful investors heed Ben Graham’s advice: “Have the courage of your knowledge and experience. If you have formed a conclusion from the facts and if you know your judgment is sound, act on it—even though others may hesitate or differ.”

Exposure to diverse inputs is crucial to developing sound contrarian views. As an idea takes hold in the investment community, it tends to crowd out alternative points of view. Skillful investors constantly seek input from a variety of sources, primarily through reading. Phil Tetlock, a psychologist who has done groundbreaking work on the decision making of experts, writes that “good judges tend to be . . . eclectic thinkers who are tolerant of counterarguments.

This part of the process also acknowledges, and takes steps to mitigate, the biases that emanate from common heuristics. These biases include overconfidence, anchoring, the confirmation trap, and the curse of knowledge, to name just a few. Overcoming these behavioral pitfalls is not easy, especially at emotional extremes. Techniques that are helpful include expressing views in probabilistic terms, constantly considering base rates, and maintaining a decision-making journal."

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