I’m really excited for our Evidence-Based Investing Conference later this month in Orange County, CA. I’ll get to see some old friends. The resort looks amazing. And somehow I’ve never been to California in my entire life so this visit will be a first for me.
Plus the agenda for the conference is stacked. There are tons of great speakers and panels throughout the conference but there are two keynote speakers that I’m really looking forward to seeing live — Michael Mauboussin and Meir Statman.
I’ve been following both of their work for a number of years now and can’t wait to see them in person. In honor of their appearance at the conference, I went through some of my old notes, books, highlights and blog posts and picked some of their greatest hits in quote form.
First up is Mauboussin. Here he is on process versus outcomes:
We have no control over outcomes, but we can control the process. Of course, outcomes matter, but by focusing our attention on process we maximize our chances of good outcomes.
On what really matters for investment success:
Investment philosophy is really about temperament, not raw intellect. In fact, proper temperament will beat high IQ all day.
Short-termism is the tendency to make decisions that appear beneficial in the short term at the expense of decisions that have a higher payoff in the long term.
On skill and luck:
The paradox of skill says that when the outcome of an activity combines skill and luck, as skill improves, luck becomes more important in shaping results. There’s a quick and easy way to test whether an activity involves skill: ask whether you can lose on purpose. For activities near the luck side of the continuum, a good process is the surest path to success in the long run. Emphasizing what’s in your control allows you to adopt an attitude of equanimity toward luck. You’ve done all that you can, and from there you have to live with the results—good or bad.
On understanding expectations:
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.
On documenting your decision-making process:
Here’s what you do. Go out and get a notebook. When you are making a consequential decision in your portfolio, business, or life, write down what you expect to happen, why you expect it to happen, and attach probabilities to your views. If you are so inclined, also jot down how you feel physically and emotionally. Make sure you note the date and time.
This practice is valuable because it mitigates some common cognitive traps. The first of these is hindsight bias, the sense that you knew what was going to happen, before the event occurred, with a greater probability than you actually did. Creeping determinism is a related trap. This is the name for the sense that what happened was inevitable. In both cases, your mind draws out the facts around an event that occurs and weaves a narrative to explain the result. You do this unconsciously and effortlessly. Knowledge of the outcome and the facts behind it bleed into your memory, and you start to believe that you knew more than you did.
On reversion to the mean:
There are few corners of the investment business where reversion to the mean does not hold sway.
On investing in the markets as they are not as we wish them to be:
Too many investors cling to attribute-based approaches and wring their hands when the market doesn’t conform to what they think it should do.
On putting too much emphasis on the past:
Be very careful using the past to understand the future. Past multiples are only relevant to the degree to which the underlying drivers of value are consistent through time. In fact, many of these drivers have changed, greatly diminishing the utility of past averages.
Now here are some of my favorite lines from Statman. Here he is on financial advisors:
Financial advisors frame themselves as investment managers, providers of “beat-the-market” pills, when, in truth, they are mostly managers of investors.
On how good advisors are like good doctors:
Good financial advisors are good financial physicians. Good advisors possess the knowledge of finance, as good physicians possess knowledge of medicine, and good advisors add to it the skills of good physicians: asking, listening, empathizing, educating and prescribing.
On emotional shortcuts:
Emotional shortcuts stirred by the fragrance of fresh cookies might induce us to buy a house they were baked in, overlooking a shaky foundation and leaky roof. Cognitive shortcuts that simplify choices induce us to buy 100 shares when a stockbroker offers a choice of 100 or 200 shares when we would have chosen to buy no shares if it were among the presented choices.
On how our emotions shape the markets:
The sum of our wants and behaviors make financial markets go up or down as we herd together or go our separate ways, sometimes inflating bubbles and other times popping them.
On knowing your place in the markets:
But investments are different from surgery because the human body does not resist the surgeon. But there’s always a trader on the other side of you and one of you is an idiot.
Risk is not measured by standard deviation but rather by the probability of not getting to your goal.
On regret (which is a crucial emotion when investing):
Regret is a painful emotion but it is also an effective teacher. Regret over unwise choices teaches us to make better ones.
On how our views on money are shaped:
The balance each of us strikes between the desire for hope for riches and the desire for freedom from fear of poverty is shaped by our circumstances, life experiences, gender and age, personalities, and cultures.
On what people want:
If you look into what people really want, [they] say we want two things. One is not to be poor. And the other is to be rich. So we buy both insurance and we buy lottery tickets.
Both Statman and Mauboussin have written great books. Statman’s What Investors Really Want is one of the more under the radar investment books out there and his new book, Finance for Normal People: How Investors and Markets Behave, has such a great title that I’m jealous I didn’t think of it.
Mauboussin’s most well-known book is probably The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing, but Think Twice: Harnessing the Power of Counterintuition and More Than You Know: Finding Financial Wisdom in Unconventional Places were also excellent reads. Mauboussin also has a huge library of white papers, two of my favorites being Methods to Improve Decisions and The Babe Ruth Effect: Frequency vs. Magnitude.
There are still a few slots open for the conference so register here:
Evidence-Based Investing Conference (West)