DeepSummary
The episode features an in-depth conversation with Michael Mauboussin, Head of Consilient Research at Counterpoint Global, a $70 billion equity manager. Mauboussin discusses his recent research on pattern recognition, exploring when it works effectively and when it's likely to be ineffective. He distinguishes between intuitive expertise and mere experience, emphasizing that true experts have predictive models that actually work.
They delve into the changing nature of public markets, inspired by Mauboussin's research on birth, death, and wealth creation. The discussion covers the shrinking number of public companies, the concentration of wealth creation in a small percentage of companies, and the challenges faced by active managers in identifying and holding on to these wealth-creating superstars.
Mauboussin shares insights on increasing returns, easy money policies, and the use of decision aids by fundamental investors. He also reflects on lessons learned from successful investors, emphasizing curiosity, open-mindedness, and the ability to focus on one's strengths.
Key Episodes Takeaways
- Pattern recognition can be effective in stable, linear domains where true expertise can develop, but is often overused in complex, adaptive systems like markets.
- A small percentage of public companies have generated the majority of wealth creation historically, but identifying and holding these 'compounder' stocks through massive drawdowns is extremely challenging.
- Successful investors tend to display insatiable curiosity, open-mindedness to updating views based on new information, and a focus on leveraging their strengths.
- Fundamental investors could benefit from greater use of decision aids like base rates and position sizing models.
- The changing public market landscape, with fewer listed companies and concerns around private market exits, presents new challenges for active managers.
- Distinguishing skill from luck in evaluating investment manager performance is crucial.
- Easy money policies from central banks did not lead to increased corporate investment as expected, highlighting potential gaps between theory and practice.
- Concepts like increasing returns and power laws help explain winner-take-all dynamics across different domains.
Top Episodes Quotes
- “The key here is to sort out, when you think about the past performance of others, what components are attributable to skill and what components attributable to luck or something else.“ by Michael Mauboussin
- “But I think the one that was most striking was that he documented that almost every one of these great compounders had massive drawdowns at some point. And it was common to have drawbindows at 75% or more, but some were 80, 85% drawdowns. And to state the obvious, it shakes out all but the very hardiest of shareholders.“ by Michael Mauboussin
- “Good advice would be to figure out what you're good at because you're more likely to be able to add value doing something you're good at.“ by Michael Mauboussin
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Episode Information
Capital Allocators – Inside the Institutional Investment Industry
Ted Seides – Allocator and Asset Management Expert
2/19/24
Michael Mauboussin is the Head of Consilient Research at Counterpoint Global, a $70 billion equity manager. Michael is renowned for his ability to articulate important investment concepts backed by academic research. His first of three prior conversations on the show is replayed in the feed. You can find the rest at capitalallocators.com.
Our conversation explores Michael’s most recent piece on pattern recognition, including when it works and when it doesn’t. We then transition to discussing the changing nature of public markets, inspired by another of Michael’s recent research reports entitled Birth, Death, and Wealth Creation.
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