The Ledger
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Mauboussin: US public companies declined from 7,300 in 1996 to 4,200
“In 1996, we reached the apex, which is a little over 7300 companies. Today, we don't have the 20, 23 numbers yet, but it's gonna be around 4200. So we're not only way lower than the peak, we're lower than we were in the 19 seventies.”
Mauboussin: US IPOs averaged 280 annually before 2001 vs 120 since
“The main way companies get added are initial public offerings, and what we've seen is IPOs from 76 to 2000 averaged about 280 per year. They're a couple years way above that, and since 2001, they're about a 120. And by the way, the last couple years, Have been…”
Mauboussin: Finding superstar compounders creates difficult portfolio diversification challenges
“The one thing I'll point out though, I guess to state the obvious, is if you do find one or two or three of these superstar companies, They appreciate a lot, and they get really big in your portfolio, and so you get in these interesting challenges with diversi…”
Mauboussin: DOJ and FTC antitrust focus chills strategic M&A exits
“We've seen a really substantial uptick in antitrust focus. Whether or not the Justice Department or FTC wins these cases, it creates friction and makes managers and executives, it creates uncertainty as to whether they want to do these things.”
Mauboussin: Sponsor-to-sponsor sales became the primary buyout exit mechanism
“Obviously the number one technique for buyouts to exit was selling to other buyout firms.”
Mauboussin: Mandatory long lockups in VC and PE benefit investors
“And because venture and buyouts have essentially longer time horizons, whether people like it or not, they have to sit in their seats for a while. And that's actually, I think probably been to their benefit versus to their detriment.”
Mauboussin: Non-Financial Companies Built Cash Rather than Investing During Easy-Money Era
“What did companies actually do? None of that stuff. They actually didn't invest more. And so what capital structures got more conservative cash balances. Built up on balance sheets is excluding financial services companies.”
Mauboussin: Investors must understand underlying economics before using valuation multiples
“I always tell my students, you have to earn the right to use a multiple. In other words, you can demonstrate that you understand what the economic implications are. That always bothers me that people are very comfortable throwing around heuristics or multiples…”
Mauboussin: An activity involves skill if you can lose on purpose
“You know there's skill in the activity if you can lose on purpose.”
Mauboussin: Decision-Making Under Stress, Not Technical Skills, Separates Great Investors
“A lot of what led to great investors versus good investors had nothing to do with actually those technical skills. Those were requisites to get into the game prerequisites for the game, but not the keys. It was really how they made decisions and especially the…”
Mauboussin: The Biggest Decision Failure Is Failing to Consider Alternatives
“If I had to put this under one big banner, the big banner I would probably select is they fail to consider alternatives.”
Mauboussin: Combining Inside and Outside Views Is Best Decision-Making Approach
“What I think Kahneman and many other psychologists have demonstrated beyond the shadow of a doubt is the combination of this inside and outside view is the best way to think about things.”
Mauboussin: Base rates are vastly harder to apply in power-law domains
“So some Base rate distributions are fairly well behaved, you know, things like sales growth rates for companies, obviously things like, you know, a lot of things that are normally distributed in life, like the heights of people and so forth. And then there is …”
Mauboussin: Exploration Naturally Decreases and Exploitation Increases With Age
“When you're young, you know, exploration is much more interesting than exploitation, right? So you want to try out the new restaurant, meet new people and so on and so forth. And as you get older, right? Well, your payoffs are much more finite, right? And ther…”
Mauboussin: Assigning Probabilities Compels Deeper Analysis and Better Discussion
“Just asking people to assign a probability, just that app, as you point out, compelled sort of a much more thoughtful process, which then led to a much more, you know, much richer discussion around the issues. So you're right. Probably the calibration is sort …”
Mauboussin: Losing initial cash flows reduces a company's present value by only 10-20%
“Somewhere between it can be 10 to 20%, but that's sort of the high end.”
Mauboussin: Perpetually elevated volatility has only occurred in the 1930s
“The only time we've ever seen sort of perpetually elevated Volatility was back in the 19 thirties. So right after the crash of 1929.”
Mauboussin: High yield debt provides a direct comparability benchmark for equities
“High yield typically trades not dissimilarly to equities. It's a little bit more of a senior claim. And so you have sort of something that's not too far off in terms of a comparability and allows you to sort of calibrate.”
Mauboussin: Bond markets faced widespread bid-ask freezes in Q4 2018
“I think that came to the forefront in the fourth quarter of 2018.
I think there were people that wanted to trade bonds that simply there weren't bids and offers out there for the most part.”
Mauboussin: Market information cascades propagate using identical network dynamics to physical viruses
“This is also how ideas spread. We talk about this really much in the context of markets. What is an information cascade? It's an idea propagating across a network. Why do we all come to uniform beliefs and markets from time to time? Same basic. It's a mind vir…”
Mauboussin: Frequent Portfolio Monitoring Amplifies Myopic Loss Aversion
“The more frequently you look at the market, the more likely you are to see losses. And so myopic loss aversion says for people who frequently revisit their portfolios, they're more likely to see losses, hence suffer from aversion, and hence increase their equi…”
Mauboussin: Markets Will Probably Revert to Pre-Crisis Levels Within 3–24 Months
“One of the answers is, literally, if you're, especially for individuals, is don't look at that And recognize that in three, six, 12, 24 months, things would probably revert back to something that's pre-crisis levels.”
Mauboussin: Doing the boring thing protects decision-makers while optimal risks invite criticism
“Just doing the boring thing never gets you fired, but doing the risky thing that's the right thing exposes you to potential criticism.”
Mauboussin: Luck-Driven Strategies Require Larger Sample Sizes to Prove Skill
“The more luck there is, essentially, actually, the more patient you have to be to see if a good process is going to reveal a skill over time. So it's sort of this backwards thing, like, you need larger sample sizes when there's more luck.”
Mauboussin: Edge Requires Both Information Insight and Implementation Efficiency
“The other thing I'll just say in doing this research, I probably underappreciate it, which is that there's really a market for information. So figuring things out or what you want to do, but there's also a different market, like an asset market for how to impl…”
Mauboussin: Investment Committees Should Always Use Independent Ballots for Decisions
“And once again, for example, a simple rule, if you're ever voting on something, it always should be independent ballots. What is not uncommon is for people just to go around the room and say, hey, Ted, what do you think? So, you know, Ted, you're a really impo…”
Mauboussin: Position Sizing Drives Portfolio Performance More Than Stock Picking
“Like, you and I can have the exact same 25 stocks, but what we know is how we size our positions will have
A huge impact on how our portfolio performs over time.”
Mauboussin: Investors are overconfident on small samples and underconfident on large samples
“If you have strong strength and low validity, like small sample size, people tend to be overconfident. So you flip that thing 10 times, they go, it's a tails biased coin, right? The opposite side would be like, if you flip the coin 10,000 times and it comes up…”
Mauboussin: Most stocks have only two or three linchpin value drivers
“For most stocks, there tend to be two or three sort of key issues. You might call them linchpin issues, perhaps, and the ability to find those things and dwell on them as soon as possible tends to be very helpful”
Mauboussin: Markets Are Slow to Price Value-Chain Earnings Spillover to Suppliers
“If you think about a value chain for an industry, so companies and suppliers and so forth, that if one part of the value chain, so for example, if a customer does poorly in an earnings report, for instance, it likely indicates that the supplier is going to do …”
Mauboussin: Discretionary managers cannot compete with quants on short-term horizons
“Natural language processing and computers and so forth will allow some parts of the market to be very efficient in the short run. You can make shorter term predictions. And that will probably make that aspect of the market more efficient. And by the way, as a …”
Mauboussin: Arbitrageurs often lack capital during the most attractive opportunities
“It is often the case when some of the arbitrage opportunities are among the most attractive, the arbitrageurs don't show up. And the main reason they don't show up is because they don't have access to capital.”
Mauboussin: Non-fundamental demand shocks create excess returns in asset markets
“So there have been some really interesting papers about, like, who has the money, what do they want to buy, and what does that mean for these downward sloping demand curves, and there's good evidence that you create these sort of excess returns as a consequenc…”
Mauboussin: Pre-commitment contracts and checklists remove emotion from crisis investing
“And the reason a read, do checklist is really helpful is it takes the emotion out and gives you an action plan. And I think we need something akin to that in the world of investing, which is take the emotion out, have an action plan, and allow people to act on…”
Mauboussin: Institutional Agency Friction Drives Harmful Action Bias Over Patience
“If there's poor performance, alarm bells come up and down the chain and the committee doesn't say like, Let's do nothing. They always say, like, we should do something, right? So this notion, and by the way, I think it's a Western thing, maybe an American thin…”
Mauboussin: Standard Deviation Of Active Manager Alpha Has Narrowed Over Time
“So one of the ways to quantify that as we measure the standard deviation of excess returns, the standard deviation of alpha, right? So you imagine alpha plotted as a bell shaped distribution, which is roughly not a horrible way to look at it. And that bell has…”
Mauboussin: Market Return Dispersion Widens When Unsophisticated Investors Enter The Fray
“I think when you see episodes of people who are less sophisticated getting involved with reasonable sums of money, that's probably the case where you could get that standard deviation blow back out.”
Mauboussin: DOL Fiduciary Rule Accelerated The Shift To Passive Indexing
“So I think the DOL rule itself was probably a pretty important specific catalyst for acceleration of indexing.”
Mauboussin: Asset-Weighting Lifts Active Manager Outperformance Rates To The Mid-Forties
“If you look at it on an asset weighted basis, the numbers go, they're not quite 50, but they get into the mid to high So it's a temp called a 10 or 15% uplift on that percentage basis.”
Mauboussin: Harvard Research Shows Optimal Team Size Is Four To Six People
“Richard Hackman as a professor at Harvard. And, you know, he studied teams across all different disciplines and found that the optimal tie size was four to six.”
Mauboussin: Keith Stanovich Distinguishes Rational Decision-Making Ability From General IQ
“Stanovich has made this really important distinction between IQ, which measures something very real, helpful, more of it tends to be better, and what he calls RQ, rationality quotient, which is the ability to make good decisions.”
Mauboussin: Combining Non-Traditional Backgrounds With Rationality Testing Drives Team Success
“Find people with sort of weird backgrounds, but essentially test them or assess them on their ability to think rationally. And it could be that combination that might be the sweet spot for success.”
Mauboussin: High-Yield ETFs Are Much More Liquid Than Their Underlying Assets
“Most of the volume, for example, in ETFs would be things like the SPDR, which is the S&P, and there's just not, there's unlikely to be a big issue there, but as you point out, we've had this massive proliferation, and especially into credit markets, and you kn…”
Mauboussin: Traditional Liquidity Metrics Cannot Be Properly Tested In Non-Stressed Environments
“Dealer inventories are way down, and I just don't think we've tested it, because many of the traditional tests of liquidity are things like bid-offer spreads and realized prices, but you can't really test it in non-stressed environments.”
Mauboussin: Elite Pitch Framing By Baseball Catchers Produces Substantial Win Deltas
“Simply bringing in a pitcher, a catcher, pardon me, who's really good at pitch framing can lead to, the numbers seem to me like unbelievable, you know, over a season, substantial delta in the number of games won.”
Mauboussin: Complex Adaptive Systems Explain Both Market Efficiency And Episodic Crashes
“I think that the market as complex adaptive systems both explains why markets tend to be efficient. This is, you know, the wisdom of crowds concepts. But also explains why markets episodically go haywire, which they clearly do.”
Mauboussin: Forced Sellers And Buyers Create Active Investing Opportunities
“There are people who are for sellers. There are people who are forced buyers and they're doing things that are non-economic or for non-economic reasons. And those can present opportunities for the other side.”
Mauboussin: Analysts Usually Evaluate Deals As One-Offs Rather Than Using Frameworks
“And I just found as an analyst over the years and a strategist and so forth that analysts, almost every deal, it's like a one-off right there. They're analyzing it without a framework. And if you have a framework for it just allows you to put things into conte…”