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Michael Mauboussin Interview


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I was fortunate enough to have the opportunity to interview Michael Mauboussin. We talked about what advice he’d offer his younger self today, the definition of luck, decision journals, how organizations can improve their decisions and more.

 

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Your most recent book, The Success Equation, points out something that few people seem to consider: that most things in life are a mixture of luck and skill. What’s the mental model we can take away from this?

 

The main point is to think critically about the activity you’re participating in and consider how much luck contributes to the outcome. In some realms it’s negligible, such as a running race. But in others, it’s huge. Once you understand luck’s role, you can understand how to approach the activity more thoughtfully, including how you develop skill and interpret results.

 

But I can tell you that our minds are horrible at understanding luck. So any mental model has to overcome our natural tendency to think causally—that is, that good outcomes are the result of good skill and bad outcomes reflect bad skill.

 

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Full interview: www.farnamstreetblog.com/2013/08/michael-mauboussin-interview-no-4/

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We talked about what advice he’d offer his younger self today

 

How about don't pick Enron as your stock pick of the year for 2002 on a Forbes "Pick One Stock" panel just a month before it enters bankruptcy (Dec. 2001):

 

https://www.forbes.com/forbes/2001/1210/174.html#5427bb575a96

 

Ok that's a bit harsh.  But it shows how analytical ability and strategic thinking is not enough - one needs more than high IQ to be a successful stock picker.  Its easy to think you are investing when you are speculating.

 

wabuffo

 

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We talked about what advice he’d offer his younger self today

 

How about don't pick Enron as your stock pick of the year for 2002 on a Forbes "Pick One Stock" panel just a month before it enters bankruptcy (Dec. 2001):

 

https://www.forbes.com/forbes/2001/1210/174.html#5427bb575a96

 

Ok that's a bit harsh.  But it shows how analytical ability and strategic thinking is not enough - one needs more than high IQ to be a successful stock picker.  Its easy to think you are investing when you are speculating.

 

wabuffo

 

Good catch. This was in 2001 or 19 years ago. It is likely that his thinking has evolved since then.

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It is likely that his thinking has evolved since then.

 

I dunno man, he had been writing his strategic think pieces for almost five years when he picked Enron.  Here's one of his early ones from Jan. 1997.  I think he's a case of those who can't do, teach.... or something like that. 

 

wabuffo

Then would  a reasonable compromise be to read what he writes but to ignore his stock recommendations?

 

I liked The Success Equation. Some of it has to do with humility and the role of luck.

From the book:

“For almost two centuries, Spain has hosted an enormously popular Christmas lottery. Based on payout, it is the biggest lottery in the world and nearly all Spaniards play. In the mid-1970s, a man sought a ticket with the last two digits ending in 48. He found a ticket, bought it, and then won the lottery. When asked why he was so intent on finding that number, he replied “I dreamed of the number seven for seven straight nights. And 7 times 7 is 48.”

 

Signed: The patsy at the table

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We talked about what advice he’d offer his younger self today

 

How about don't pick Enron as your stock pick of the year for 2002 on a Forbes "Pick One Stock" panel just a month before it enters bankruptcy (Dec. 2001):

 

https://www.forbes.com/forbes/2001/1210/174.html#5427bb575a96

 

Ok that's a bit harsh.  But it shows how analytical ability and strategic thinking is not enough - one needs more than high IQ to be a successful stock picker.  Its easy to think you are investing when you are speculating.

 

wabuffo

 

You've never made mistakes? Good for you.

 

All the smartest hedge funds were in Valeant. ValueAct, Ackman, Glen Greenberg, Sequoia, and a bunch of others.

 

I'm sure they're all terrible stock pickers.

 

Mauboussin is one of the best the field has to offer and has thought more people more useful things than almost anyone this side of Buffett and Munger.

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Liberty - of course we all make mistakes.  That's not my point.

 

This was months after Skilling's profanity-laced conference call and his subsequent resignation.  It was obvious by this time that Enron was a fraud and going down.  In Valeant's case, those smart people went in before it blew up.

 

My point is a subtle one - there are plenty of smart strategy people who are well read - but it would be a mistake to trust them to run a lemonade stand.  There's many folks who can quote Buffett but aren't capable of running a business or allocating capital in real-life.  That's because the business world (and markets) is a lot more complex than can be fitted into a Powerpoint presentation.

 

That's what makes Buffett and Munger so unique.  They embrace mental models and optionality but reject strategic planning and its rigidity.  There are other CEOs like Buffett who are smart in that way - "ie, I'm a better investor because I'm a business manager, I'm a better business manager, because I'm an investor". 

 

That doesn't mean there isn't some value in reading HBR articles or Mauboussin's writings...  just be careful trying to apply these strategic planning models to real-world businesses and investing.

 

wabuffo

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Liberty - of course we all make mistakes.  That's not my point.

 

This was months after Skilling's profanity-laced conference call and his subsequent resignation.  It was obvious by this time that Enron was a fraud and going down.  In Valeant's case, those smart people went in before it blew up.

 

My point is a subtle one - there are plenty of smart strategy people who are well read - but it would be a mistake to trust them to run a lemonade stand.  There's many folks who can quote Buffett but aren't capable of running a business or allocating capital in real-life.  That's because the business world (and markets) is a lot more complex than can be fitted into a Powerpoint presentation.

 

That's what makes Buffett and Munger so unique.  They embrace mental models and optionality but reject strategic planning and its rigidity.  There are other CEOs like Buffett who are smart in that way - "ie, I'm a better investor because I'm a business manager, I'm a better business manager, because I'm an investor". 

 

wabuffo

 

Buffett did technical analysis when he started and made plenty of mistakes, including buying Berkshire. Mauboussin hasn't made stock recommendations in all the time that I've known him, and looking back at a bad call from 20 years ago with obvious hindsight bias has little value to me. I judge him on his output, and that output is brilliant. If you throw out the baby with the bathwater, it's your loss.

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This was months after Skilling's profanity-laced conference call and his subsequent resignation.  It was obvious by this time that Enron was a fraud and going down.  In Valeant's case, those smart people went in before it blew up.

 

My point is a subtle one - there are plenty of smart strategy people who are well read - but it would be a mistake to trust them to run a lemonade stand.  There's many folks who can quote Buffett but aren't capable of running a business or allocating capital in real-life.  That's because the business world (and markets) is a lot more complex than can be fitted into a Powerpoint presentation.

 

That's what makes Buffett and Munger so unique.  They embrace mental models and optionality but reject strategic planning and its rigidity.  There are other CEOs like Buffett who are smart in that way - "ie, I'm a better investor because I'm a business manager, I'm a better business manager, because I'm an investor". 

 

That doesn't mean there isn't some value in reading HBR articles or Mauboussin's writings...  just be careful trying to apply these strategic planning models to real-world businesses and investing.

 

wabuffo

 

+1

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