In this episode, Michael Mauboussin and I discuss everything about asset management: the state of the industry, the active investment process, and Michael’s simple but genius “input/output” method for daily life. This is a full seminar on asset management. It was an awesome conversation.
Be sure to check out all of Michael’s research and his four books, which are linked below. I especially enjoyed his book Expectations Investing, which is mercifully now available on kindle.
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Books & Resources Mentioned in this Conversation
Reflections on the Ten Attributes of Great Investors (this is a must-read paper by Mauboussin)
(1:31) Contrarian Investment Strategies – David Dreman
(1:38) Expectations Investing – Alfred Rappaport and Michael Mauboussin
(7:05) The Nature of Value : How to Invest in the Adaptive Economy – Nick Gogerty
(16:33) Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor – Seth Klarman
(26:39) – Creating Shareholder Value: A Guide for Managers and Investors – Al Rappaport
(54:58) – The Outsiders: Eight Unconventional CEOs and Their Radically Rational Blueprint for Success – William Thorndike
(1:08:18) – Beat the Dealer: A Winning Strategy for the Game of Twenty-One – Ed Thorpe
(1:30:04) – Thinking, Fast and Slow – Daniel Kahneman
(1:31:42) – The Story of the Human Body: Evolution, Health, and Disease – Daniel Lieberman
1:50 – (First question) – Questions Michael about his personal habits and system to being successful. Michael highlights that sleep, exercise, diet are key to being more productive, but the most important one is that he does a lot of reading.
3:41 – A look at how Michael discovers new books to read and why he looks at books of a broad topics and opinions.
5:59 – The books beyond business and investing that are of interest to Michael
7:13 – The discussion turns to whether you can actually learn more through writing and teaching verses reading
10:06 – The conversation shifts to investing and Michael looks at the key function of active managers
11:37 – Where will the market settle in its ratio of active to passive managers and why the market needs active managers
15:23 – Is more passive management good or bad for the active management community?
21:20 – Patrick questions whether industry dynamics are impacting the pool of active managers
25:45 – A deep dive into active management, starting with where the framework of “Expectation Investing” came from.
28:47 – Biggest mistake active managers make is not distinguishing between fundamentals and expectations.
31:10 – High jumper metaphor for value vs expectations.
34:01 – Why Michael is critical of P/E ratios and earnings as the appropriate proxy for the health and success of a business, and what he prefers to use as an overall indicator.
41:05 – Are there qualitative ways of picking visionary leaders and companies that will enjoy huge success like Amazon?
45:24 – Michael turns the table and asks Patrick how they do capital allocation?
47:35 – A look at buybacks and whether companies should be spending as much as they do on them.
51:20 – The focus shifts to whether companies should really be paying a dividend when investors can basically create their own
55:40 – What is the edge that distinguishes active managers from each other.
1:01:42 – The focus shifts to whether the same skill sets are needed for selling assets.
1:03:46 – A look at the state of portfolio construction skill out there and what method Michael would choose to weight a portfolio once the selections are made.
1:07:10 – A look at the often underutilized but possibly effective system known as the The Kelly Criterion
1:12:11 – Patrick looks to get Michael’s take on quantitative investing and if it is taking away the skill from other active managers.
1:16:20 – Why a combination of humans and computers making decisions is the ideal combination.
1:19:26 – The role of intuition in investing
1:22:05 – What would Michael prefer, active stock pickers or index tracking funds?
1:25:39 – Patrick questions Michael about the aspects of his career/life that stand out as being most satisfying.
1:28:00 – Now a shift to see what is Michael most looking forward in his career.
1:30:04 – Michael says Thinking, Fast and Slow would be the one book he would have everyone read.
1:31:23 – A look at Michaels habits when it comes to sleep and nutrition to keep in his best form.
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