Michael Mauboussin - Overcoming Biases for Effective Decision-Making

SPEAKER_1 (0:00)

Value Investing is more than an investment strategy. It's a fundamental way of thinking about finance.

Welcome to Value Investing with Legends, a podcast hosted by Tano Santos, the David L and LCM Dodd Professor of Finance at the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School. Our mission today is to promote the study and practice of Graham and Dodd's original investing principles and to improve investing with world-class education, research, and practitioner academic dialogue. In this podcast, you will hear from some of the world's greatest investors, their views on the investment management industry, how they develop their investment process, and how they see the field changing over time. To learn more and to subscribe to this podcast, please visit grahamanddodd.com.

Tano Santos (0:50)

In the value investing community, of course, there's a long tradition of investor intellectual, the careful thinker who gives the academic a run for his or her money, so to speak. And I'm sure many names are coming to our audience's mind.

One of the finest practitioner intellectuals and academic at heart is my guest today, Michael Mauboussin. Welcome to the Value Investing with Legends podcast.

Michael Mauboussin (1:12)

Thank you, Tano. Great to be with you.

Tano Santos (1:14)

Michael Mauboussin is Director of Research at Blue Mountain Capital Management in New York. Prior to joining Blue Mountain in July 2017, he was the Managing Director and Head of Global Financial Strategies at Credit Suisse.

Before that, he was Chief Investment Strategies at Legg Mason Capital between 2004 and 2012

You joined First Credit Suisse in 1992 as a food industry analyst, if I'm not mistaken, and you made it all the way in record time to achieve US investment strategies in 1999 Of course, Mike is the author of three books, including The Success Equation and Tangling Skill and Lack in Business, Sports and Investing, co-author with Alfred Rappaport of Expectations Investing, Reading Stock Prices for Better Returns. But my favorite of Michael's books, and the first one I read, was and is More Than You Know, which I cannot recommend highly enough. It's one of the best business books recommended by Businessweek. It's going to feature prominently in the discussion today. But most importantly, Mike has been an adjunct professor of finance at Columbia Business School since 1993, and is on the faculty of the Heilbrunn Center for Graham and Dodd Investing. He's one of the outstanding members of our young faculty. He has received twice the Dean's Awards for Teaching Excellence in 2009 and 2016 And I think something that you're very proud of, and rightly so, is that you're the chairman of the Board of Trustees of the Santa Fe Institute, which, as many in the audience may know, is the interdisciplinary center devoted to complex systems. So that's a long curriculum.

And I want to start a little bit with your professional career. Of course, I want to have a long conversation about many of the interests you have had throughout your career as a public intellectual when it comes to many of the issues in behavioral finance, psychology, and so on and so forth. But I want to understand a little bit your own personal story here. I always wanted to ask you this, this kind of arch between becoming a food analyst for Credit Suisse and then evolving into this larger role as a chief US strategist and this role that you also had at Legg Mason. How did you go from the small to the large? How do you do the learning from all that? I wanted to know a little bit about that.

Michael Mauboussin (3:21)

Still learning Tano every day. Well, in university, I was a liberal arts major. I was a government major actually and an economics minor. And I think I can safely say I've never used anything I learned in economics in my real job.

So I joined Wall Street, Drexel Burnham-Lambert actually in the mid-1980s. It was a very exciting time of course on Wall Street. But as a liberal arts major, I knew nothing. As I like to say, I was unencumbered by knowledge. But I think I encountered a lot of rules of thumbs and old wives' tales and this is how we do things around here. And I would say that sort of my way of thinking is I want to understand things from first principles.

Early on in 1987, a guy in my training program at Drexel Burnham handed me a copy of Al Rappaport's book Creating Shareholder Value. For me, that was a professional epiphany because it created a framework for thinking about the world. And there were three points in particular that Rappaport made in that book, which I still carry close to my heart and I think animated all the things I've done that you've listed off. The first point he made was value is about cash flows at the end of the day, not accounting numbers. And it seems to be a lesson that we relearn from time to time, but really drilling down into numbers to understand economic value. The second lesson he had, and I think it's something in business school we could do a better job of candidly, is he made the point that valuation and competitive strategy analysis should be joined at the hip. In school, we teach our students strategy and its five forces and value chains and a lot of the great contributions from Bruce Greenwald and you and others.