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 isn’t appropriate for all. Active managers, he says, “perform two vital functions: they promote price discovery—a fancy way to say they make prices largely efficient—and they provide liquidity.”
  • Markets must be “sufficiently inefficient” to entice active managers to do their job, and there needs to be “an offsetting benefit in the form of excess returns to compensate.”
  • Mauboussin cites research showing that actively-held stocks are more efficiently priced than passively held stocks. Further, he says, “we don’t really know what the impact will be on liquidity,” adding that there could be less liquidity in a period of stress than most academics and professionals anticipate.
  • On the rise of smart/beta products and ETFs, Mauboussin suggests that a blend of both systematic and discretionary investing approaches may be better than either alone. “My view,” he says, “is that the future is about augmented intelligence,” explaining that the two approaches can learn from the other.
  • Mauboussin cites technology, regulation and academic research as major contributors to change in the finance industry during his career. “All of that said, “he adds, “markets are still made up of groups of humans (or the algorithms they write). So age-old issues such as booms and busts are not likely to disappear any time soon.”
  • He believes that great investors are able to understand market efficiency, valuation, and the competitive position of a business.