Michael Mauboussin - Man + Machine, Moats, and Power of the Outside View

**Patrick O'Shaughnessy** (0:00)
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Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_2** (0:59)
Patrick O'Shaughnessy is a Principal and Portfolio Manager at O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (1:21)
My guest today is Michael Mauboussin, who is the head of Global Financial Strategies at Credit Suisse and on my short list of must-read writers on all things investing.
If you just read his entire catalog, Howard Marks' memos, and Buffett's shareholder letters, you'd be sitting pretty. He was also a big reason for the early success of this show, appearing as my second guest and now as my 37th.
Michael and his team have been prolific in the last six months, publishing several long research reports on the most interesting aspects of the investing landscape. In this conversation, we talk about business modes, industry analysis, and how to combine man and machine when building an investment strategy and portfolio. As I tell Michael at the end, you won't be able to listen to this episode at two times speed because we go deep quickly.
You can find show notes for this episode at investorfieldguide.com forward slash Michael, and now please enjoy my conversation with Michael Mauboussin.
Well, Michael, thanks for coming back yet again. We're going to have a lot of fun discussing, I think, five or six of your recent papers, which it's kind of mind bending how much work you put out since six months ago. When we first talk, I know you've got, I know you've got great support and help, but it's been a fascinating collection of papers on things like the Active Passive Debate, the declining propensity of companies to list their shares. What is a moat? How might you find one? How much should you pay for one? All these things will be really interesting to talk about, but we were having a conversation, and I figured I'd just hit record, and we'll start with this Active Passive Debate. And really the two, I've heard kind of two big outstanding questions, which is where is the point of equilibrium? We need some active management. Obviously, the trend is more and more passive.
Kind of what is that point? No one seems to agree on that. And then the second point is that I keep hearing, yes, everyone's going passive, and it's cheaper, which is great. But behavior gaps aren't going to go away. So even if the S&P is up 10% and now people are really getting that 10% instead of 8% because they're not paying the high active fees, very often if the time-weighted return is 10, the investor's return is 5 So who's getting that behavior gap? Who's earning that? Is it companies doing buybacks? Both interesting areas to explore. So let's start with what you were telling me before we hit record, which is this really intriguing Birkin-Green model for kind of the active passive debate. And we'll start to kind of flesh these questions out.

**Michael Mauboussin** (3:42)
Well, first of all, Patrick, great to be with you. And these are really fascinating, of course, I think really important topics.
Let me say that I was very loathe to go into this active passive debate at all, in part because there had been so much ink spilled on the topic and hard to know what to add. But I got to say that what encouraged me was that a lot of the discussion I thought was very superficial, candidly. And a lot of the discussion took on tones of religious fervor, right? Whether you're on the active side or the passive side, people seem to think there is no other solution to this. So I tried to write this piece. We spent a lot of time reading academic research on this and we wrote the piece. And I have to say that my what I really did want to write, Patrick, I want to I want to write a piece that said the equilibrium is 72.4 percent, right? Like some sort of magic number. And of course, that that completely eluded me. But I was very motivated by this paper on the impossibility of informationally efficient markets, which was written by Sandy Grossman and Joe Stiglitz back in 1980 And the basic idea is very straightforward and I think economically quite sound. They said markets cannot be perfectly efficient because there's a cost to gathering information and reflecting it in prices.