Mauboussin: The Distribution of Active Manager Alpha Has Consistently Narrowed
Michael Mauboussin · Michael Mauboussin Master Class — Moats, Skill, Luck, Decision Making and a Whole Lot More · Acquired · Oct 5, 2021 · at 1:12:18
Michael Mauboussin explains how the paradox of skill compresses the standard deviation of excess returns in active public market investing.
0:00 / 0:33exact quote · 33.7s
▶ Watch the full episode on YouTube → 720p mp4 · rendered on demand · StarZero watermark
“One of the ways we can measure that is to look at the standard deviation of excess returns, right? So alpha, right? So excess returns. So, so you'd imagine and if you'd imagine If you're an active manager, what you want is a big fat bell shaped distribution, right? So lots of positive alpha that's on the right and lots of negative alpha. So you're going to be the winner and they're going to be a lot of people losing nets to zero, of course, but you're going to be right. So you want that to be fat because that means there's lots, lots to gather. And then what has happened consistently is the bell shaped distribution has gotten skinnier and skinnier and skinnier, right? Which is exactly what you expect from the paradox of skill.”
quote is from the automated transcript, cleaned for reading: filler sounds and stutters are removed, nothing is rephrased. names can be misheard (the analysis reads context, assessments check outside sources). how →
More from Michael Mauboussin
Mauboussin: High-Return Companies Should Maximize Investment Over Positive Free Cash Flow
“Some people think, oh, you want positive free cashflow. Well, the answer is not really. I mean, what you want is you, if you can invest at a high return, you want to invest as much as you humanly possibly can, right? That you have access to.”
Mauboussin: As Average Skill Increases, Luck Ultimately Dictates Outcomes
“The paradox of Gil says, and activities were both skill and luck contribute to outcomes, which is most stuff as skill increases, luck becomes more important.”
Mauboussin: Stock Outperformance Requires Exceeding Priced-In Market Expectations
“Your stock price reflects a set of expectations about the future financial performance of your company. And it behooves you to understand what's priced in. And if you want to do really well from the point of view of the stock market, you have to not only meet,…”
Mauboussin: Competitive Advantage Requires Outearning the Cost of Capital
“And so we argue that a competitive advantage should have two features. One is an absolute one. One is a relative one. The absolute one is you should have returns today or returns that are promised to be above your cost of capital, right?”
Mauboussin: Industry Shakeouts Offer Prime Investment Opportunities as Markets Consolidate
“When it rolls over, you know, so in other words, the number of companies is declining. It's actually really interesting time to invest because usually the industry itself is continuing to grow and it's a fewer number of companies that are capturing the spoils,…”