This week, we speak with Michael Mauboussin, head of consilient research at Morgan Stanley Investment Management’s Counterpoint Global and co-author of the recently revised and updated book “Expectations Investing: Reading Stock Prices for Better Returns, Revised and Updated.” Mauboussin joined Morgan Stanley in 2020 and has more than three decades of experience. He previously served as head of global financial strategies at Credit Suisse, and chief investment strategist at Legg Mason Capital Management. He is also an adjunct professor of finance at Columbia Business School and chairman of the board of trustees at the Santa Fe Institute.
We discuss why he and his co-author — famed Kellog M&A professor Alfred Rappaport — recognized it was time to update the book. Lots of things had changed over 20 years, and some of the metrics discussed when the book was first published He explains why “When investors talk about expectations, they are usually talking about the wrong expectations.” Multiples are not valuation but are shorthand for what is a for the broader valuation process. They are filled with lots of assumptions about how the world works, and are inf act a circular argument.
Mauboussin explains how the rise of intangibles — everything including patents, software, processes, copyrights, algos, logistics — is not accounted for appropriately in traditional CPA analyses. Counting this correctly almost doubles the profits of the company. Using a company like Amazon, you find that not only are their profits much higher than accounted for before, but their investments are much higher as well. Measuring intangibles more appropriately turns what appears to be expensive stocks into fast-growing companies that are less expensive than they might have initially appeared.
We also discuss why horseracing handicappers can provide instruction on value (e.g., Steven Crist on Value Investing and Horse Betting and Chapter 3 Crist on Value); also mentioned: paper on Lifetime Earnings: Do IPO Prices Predict Future Earnings?.
A list of his favorite books is here; A transcript of our conversation is available here Monday.
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Be sure to check out our Masters in Business next week with, Max Chafkin is a features editor and tech reporter at Businessweek. His work has also appeared in Fast Company, Vanity Fair, and the New York Times Magazine. His most recent book is “The Contrarian: Peter Thiel and Silicon Valley’s Pursuit of Power.”
Michael J. Mauboussin Authored Books
Expectations Investing: Reading Stock Prices for Better Returns, Revised and Updated by Michael J. Mauboussin and Alfred Rappaport
The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing by Michael J. Mauboussin
Michael J. Mauboussin Favorite Books
Scientist: E. O. Wilson: A Life in Nature by Richard Rhodes
The Genetic Lottery: Why DNA Matters for Social Equality by Kathryn Paige Harden
Consilience: The Unity of Knowledge by E.O. Wilson
Rationality: What It Is, Why It Seems Scarce, Why It Matters by Steven Pinker
JFK: Coming of Age in the American Century, 1917-1956 by Fredrik Logevall
Experimental Capitalism: The Nanoeconomics of American High-Tech Industries by Steven Klepper
Books Barry Mentioned
Last Ape Standing: The Seven-Million-Year Story of How and Why We Survived, by Chip Walter