Here’s a great interview with Michael Mauboussin in the latest Graham & Doddsville newsletter in which he discusses his insights on his value investing strategy and process. Also included in the interview are his thoughts on what separates great investors from average investors and how much of being a successful value investor is built into ones natural personality. Here is an excerpt from that interview:
Graham & Doddsville: Would you say in your opinion, an important difference between a good versus a great investor is that ability to manage the behavioral side?
Michael Mauboussin: That’s why I evolved that part of my course because knowing the mechanics of valuation, or knowing how to do the strategy analysis is almost the ante to the game. If you can’t do that, you’re not even in the game. Everyone has to be able to do that. If you distinguish the great investors from the average investors, it’s not because their cost of capital calculation is more accurate. It almost always has to do with the fact that they’re able to make good decisions and be correctly contrarian in adversity.
Seth Klarman’s got this line that I love: “value investing is, at its core, the marriage of a contrarian streak and a calculator.” The contrarian streak means if everyone thinks one thing, I’m going to at least examine the other side. But the consensus is often right. Being a contrarian for the sake of being a contrarian is a bad idea.
The second part, the calculator, is really crucial. It’s really the combination of being willing to take the other side when expectations are mispriced.
There’s another interesting question, which is, how much of this is just your natural personality? How many value investors are born that way, and how many can be trained? I think a lot of this is based on people’s natural proclivities, and we can add on some tools to help people get better at it, but guys like Warren Buffett, Charlie Munger, and Gary Brinson seem to be that way naturally.
Later in the interview he added:
There’s a famous quote from John Maynard Keynes, “worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
If I’m short retail, and everybody else is short retail and it goes up, yeah, it’s too bad, but everybody else had the same view. We’re all together, right?
That’s where it becomes really difficult. A lot of the great investors I’ve been around, somehow they don’t care much about what other people think. It’s actually a phenomenally good trait as an investor and a phenomenally not good trait as a human being.
You can read the full Mauboussin interview in the latest Graham & Doddsville newsletter here.
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