Mauboussin on the Language of Likelihood

In a recent article for the Harvard Business Review, authors Andrew and Michael Mauboussin discuss the language of probability and share analysis that shows how its subjective nature can lead to “widely different interpretations.” “Today people in the worlds of business, investing, and politics continue to use vague words to describe possible outcomes,” the article says, citing an explanation by psychology professor Phil Tetlock: “vague verbiage,” he says, “gives you political safety.” The authors created… Read More

Mauboussin Offers Insights on Active Management

A recent Forbes article offers comments and insights gathered in a recent interview with Michael Mauboussin, Director of Research at BlueMountain Capital Management (formerly Head of Global Financial Strategies at Credit Suisse): Mauboussin underscores two risks inherent in value investing: (1) buying a cheap stock that “deserves to be even cheaper”—a value trap; or (2) “shunning a statistically expensive stock that represents a good value.” While indexing is a reasonable path for most investors, it… Read More

Luck or Skill? Focus on the Process, not Performance.

By John Reese (@guruinvestor) —  Is it better to be lucky or smart? When it comes to investing, I think we can all agree that success arises from a combination of the two, but to what degree has been the subject of much debate. Those who are well-studied in behavioral finance would tell you that investing is rife with the illusion of skill—an investor’s inflated, misplaced confidence in their own abilities to choose winning stocks.… Read More

Some Thoughts On Improving the Predictive Value of Morningstar’s Ratings

By Jack M. Forehand (@practicalquant) —  The Wall Street Journal article last week that called into question the predictive value of Morningstar star ratings has caused a lot of debate in the investment industry. Many investors rely on Morningstar ratings to select funds and believe that selecting five star funds gives them the best chance of future outperformance. The Journal article shows that relying on those ratings to predict future performance is probably a bad… Read More

Zweig: The Challenge of a Smaller Stock Pool

For stock pickers, choosing among a smaller universe of stocks is much more difficult, writes Jason Zweig in a recent Wall Street Journal article. Zweig cites data from the University of Chicago’s Booth School of Business showing that the number of publicly traded equities has dropped from 7,355 in 1997 to the current level of less than 3,600. The decreased number of stocks, writes Zweig, is attributable to regulatory tape (that makes it tougher for smaller… Read More

Mauboussin on Active Vs. Passive Management

A paper co-authored by Michael Mauboussin of Credit Suisse addresses important issues to consider in relation to the continued and increasing shift from active toward passive fund management. Those investors who are moving their money to passive funds, the paper argues, are “less informed than those who stay.” For every winner, it says, there must be a loser—and if there are fewer losers, the game becomes less interesting. In other words, as markets become more… Read More

What Makes a Great Investor? Count to Ten.

“Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price,” writes Michael Mauboussin, managing director and head of Global Financial Strategies at Credit Suisse, in a paper published last week. Mauboussin shares his insights and reflections on how the investing world has changed over the past 30 years, the challenges investors face, and the importance of… Read More

4 Ways On How to Improve Forecasting Skills, a Credit Suisse Report by Mauboussin

In the aggregate, forecasters may be “roughly as accurate as a dart-throwing chimp,” but some forecasters are particularly and consistently far better than average. Credit Suisse reports that the book Superforecasting: The Art and Science of Prediction by Philip Tetlock and Dan Gardner provides important insights into how to improve forecasting skill, perhaps by as much as 60%.  In other words, there are measurable differences between run-of-the-mill forecasters and “superforecasters,” and these differences can be a guide to improving forecasting… Read More

Mauboussin: Understanding the Process Can Help Separate Luck and Skill in Investing

AAII editor Charles Rotblut, CFA, interviewed Michael Mauboussin, head of Global Financial Strategies at Credit Suisse, about the role of both luck and skill in investing (subscription required). According to Mauboussin, to separate skill from luck, you first have to look at the process that generates the output you are looking to achieve. In order to assess the process, you need to look at three important elements: Analytical: “having an ability to find situations in… Read More