Tag Archives: Michael Mauboussin

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 which you believe something the world doesn’t believe and in which you have a good foundation for such a belief.
  • Behavioral: “we are all subject to behavioral mistakes and cognitive biases. Are you aware of those things and are you taking steps to manage or mitigate them?”
  • Institutional: “this relates to the constraints in your personal or professional life that don’t allow you to do the best thing possible in terms of your process.”

Mauboussin says that if you have a process that has a sound analytical foundation, and you are aware of the behavioral biases around that process and institutional constraints don’t get in the way of following the process, then a bad outcome in the short term can be tolerated because the process will ultimately yield success.

For investors, the role of luck and skill presents a challenge because most investors weigh past performance very heavily in the selection of mutual funds and strategies and don’t understand the process that generated that performance. Mauboussin says that using a “check-list” is a good way to objectively assess a process. For example, he notes that his own personal check-list includes valuing the benefits of diversification, looking for reasonable fees, and staying within one’s “circle of competence”, which is a term used to describe staying focused on things that you understand and avoiding those things you may not have a grasp of.

Mauboussin On “Hitting .400” In Today’s Investing World

In a great interview with Barry Ritholtz on Bloomberg View, Michael Maboussin of Credit Suisse and Columbia University offered some intriguing insights into the role of luck in investing, and the qualities of successful investors. Read more

Is It Skill, or Luck?

Are successful investors good, or just lucky? In a recent interview with Morningstar, Credit Suisse’s Michael Mauboussin says they’re luckier than you think — but still have some skill.

Mauboussin, who has done extensive research into the topic of skill vs. luck, says one way to test whether any skill is involved in an activity is to see if you can lose on purpose. “If you can lose on purpose, there has to be some skill,” he says. In investing, he adds, “we know that it’s hard to create a portfolio that beats a particular benchmark, but actually given the same parameters, it’s actually pretty hard to build a portfolio that does a lot worse than the benchmark. So that tells you right away that we’re toward the luck side.” But Mauboussin also stressed that “every piece of research that’s been done on this [shows] there is differential skill in money managers. There are managers who are more skillful than others. … So, it’s not completely on the luck side, and there is a big difference between being mostly luck and all luck. And especially as you expand your time horizons, skill does tend to reveal itself.”

Mauboussin says skillful managers tend to have a few qualities in common. First, there’s an analytical piece — being able to find stocks with an edge and a high expected return and using smart position sizing are both key.

Managing behavioral biases is also critical, however, he says. He sees two big behavioral traps. The first (mostly for money managers) is overconfidence. “The way that typically shows up is projecting ranges of outcomes that are vastly too narrow, so they don’t take into consideration all the possible outcomes,” he says. For individuals, the trap is performance-chasing. “We tend to buy things that have done well only to suffer for the subsequent corrections, and we tend to sell things after they’ve done poorly only to miss the potential rally as a consequence,” he says. “So, as you know, a very well-known fact … markets have returned, say, 8% or 9% over the longer term, and mutual funds have returned little bit less than that. But the average individual investor only earns about 50% to 60% of the market returns primarily because of bad timing. So trying to get rid of that bad timing I think is one of the best possible ways to improve on the behavioral elements.”

Mauboussin says some metrics can be helpful in finding skillful managers, like active share (which measures how different your portfolio is than your benchmark) and tracking error. “It turns out high active share tends to be reasonably associated with good returns, but you don’t want too high tracking error, which is sort of making a lot of factor bets. So it’s something that’s different than the portfolio via stock-picking but not making big factor bets,” he says.





Siegel: Stocks Are Cheap

Several top strategists recently spoke at the CFA Institute Equity Research and Valuation Conference, and The Motley Fool’s Bryan Hinmon and Michael Olsen highlighted a few pieces of advice from these gurus.

One was author and Wharton Profesor Jeremy Siegel, who advised that “stocks are cheap”. Siegel said stocks are trading below average historical valuations, and noted that there has never been a 20-year period where real returns on a diversified U.S. stock portfolio have been negative.

Michael Mauboussin, Legg Mason’s Chief Investment Strategist, talked about the importance of figuring out what is already priced into a stock or the market. “Investing, he says, is a game of expectations, and you make money by sticking to situations where you believe the opportunities are greater than what other investors expect,” Hinmon and Olsen write.

In addition to Siegel and Mauboussin, NYU Stern School of Business Professor Aswath Damodaran and top-performing fund manager Preston Athey also offered their insights. To read the full article click here.