What are the attributes of great investors?
According to Michael J. Mauboussin in his paper on investing, there are a number of qualities and skills you can acquire, thatāll improve your performance as an investor.
Mauboussin is the Head of Consilient Research at Counterpoint Global, Morgan Stanley Investment Management, a multi-book author and a Professor at Columbia.
Paper that inspired this episode: Reflections on the Ten Attributes of Great Investors
“Excess returns equal skill times opportunity. All the skill in the world is for naught unless you have an opportunity to apply it. Before figuring out how you will win the game, figure out which game to play.”
~Michael J. Mauboussin
10 qualities of great investors
In this episode, Kate & Owen discuss the following qualities of great investors and provide examples and actionable ways to implement them.
1) Be numerate (and understand accounting)
2) Understand value (the present value of free cash flow)
3) Properly assess strategy (or how a business makes money)
4) Compare effectively (expectations versus fundamentals)
5) Think probabilistically (there are few sure things)
6) Update your views effectively (beliefs are hypotheses to be tested, not treasures to be protected)
7) Beware of behavioural biases
8) Know the difference between information and influence
9) Size your positions appropriately
10) Read (and keep an open mind)
English economist John Maynard Keynes asked ā
When the facts change, I change my mind. What do you do, sir?
Key quotes from Michael’s paper
“When probability plays a large role in outcomes, it makes sense to focus on the process of making decisions rather than the outcome alone. The reason is that a particular outcome may not be indicative of the quality of the decision. Good decisions sometimes result in bad outcomes and bad decisions lead to good outcomes.
Over the long haul, however, good decisions portend favorable outcomes even if you will be wrong from time to time. Time horizon and sample size are also vital considerations.
Learning to focus on process and accept the periodic and inevitable bad outcomes is crucial.”
“Most people prefer to maintain consistent beliefs over time, even when the facts reveal their beliefs to be wrong. Further, we commonly expect others to be consistent.
For example, politicians who change their views are derisively called āflip-floppers.ā The need for consistency tends to grow with age. The idea that many older people are set in their ways is grounded in truth.
Great investors do two things that most of us do not. They seek information or views that are different than their own and they update their beliefs when the evidence suggests they should. Neither task is easy.”
“Success entails considering various points of view but ultimately shaping a thesis that is thoughtful and away from the consensus.
The crowd is often right, but when it is wrong you need the psychological fortitude to go against the grain. This is much easier said than done, especially if it entails career risk (which is often the case).”
“Good readers tend to take on material across a wide spectrum of disciplines. Donāt just read in business or finance. Expand the scope into new domains or fields. Follow your curiosity. It is hard to know when an idea from an apparently disparate field may come in handy.
Finally, make a point of reading material you do not necessarily agree with. Find a thoughtful person who holds a view different than yours, and then read his or her case carefully. This contributes to being actively open-minded.”
