Search Now

Recommendations

Sunday, February 25, 2007

Investment Nuggets


Challenging conventional thinking on investing has been Michael Mauboussin's leitmotif in an investment career spanning over one-and-a-half decades. Michael Mauboussin is currently the Chief Investment Strategist of Legg Mason Capital Management, joining them in 2004. Prior to that, he served as Managing Director and Chief US investment strategist at Credit Suisse First Boston. He has brought a multidisciplinary approach to investing that draws ideas from strategy, psychology, finance and complexity theory. Something that he has dwelt at length in his latest book, More Than You Know: Finding Financial Wisdom in Unconventional Places.

"Once we've established a belief — most of which come from people around us — we are loathe to change it. Social psychologist Robert Cialdini offers two deep-seated reasons for this. First, consistency allows us to stop thinking about the issue — it gives us a mental break. Second belief, consistency allows us to avoid the consequence of reason — namely, that we have to change. The first allows us to stop thinking; the second allows us to avoid acting."

"The logic of diversity requires that we constantly develop new tools if we hope to be successful in consistently solving complex problems. Constant learning and open-mindedness are the best ways to achieve this goal, but are cumbersome and generally not innate tendencies."

"I want to leave you with the notion that we humans are still not very good at dealing with risk or uncertainty. We are still linear thinkers; we have a nearly insatiable need to link cause and effect, and we assess probabilities poorly. However, we do now better understand some of the mechanisms that underlie complex systems, and that knowledge can be very helpful in preparation for future catastrophic events."

"When allocating capital, portfolio managers need to consider that unexpected events do occur."

"As networks increasingly dominate the business landscape, it is crucial for investors to understand network effects — how the value of a network increases with more users. Network effects can be classified along a spectrum, with stronger and weaker forms. As investors, we seek companies where network effects are strong and can be captured through superior financial performance."

"We spend a lot of time comparing. In many cases the stakes are not too high. But under some conditions, including investment decisions, good comparisons are essential. It's important to recognize when you add complexity to the problem of comparison — a temporal dimension, probabilities, and vast, often-ambiguous information — people make many more mistakes. Awareness of the pitfalls and taking some steps to mitigate them can go far in making you better at comparing — and investing."