This note is one of a series about the books that have informed and inspired my life and work.
Since its first publication, Michael J. Mauboussin's popular guide to wise investing has been translated into eight languages and has been named best business book by BusinessWeek and best economics book by Strategy+Business. Now updated to reflect current research and expanded to include new chapters on investment philosophy, psychology, and strategy and science as they pertain to money management, this volume is more than ever the best chance to know more than the average investor.
Offering invaluable tools to better understand the concepts of choice and risk, More Than You Know is a unique blend of practical advice and sound theory, sampling from a wide variety of sources and disciplines. Mauboussin builds on the ideas of visionaries, including Warren Buffett and E. O. Wilson, but also finds wisdom in a broad and deep range of fields, such as casino gambling, horse racing, psychology, and evolutionary biology. He analyzes the strategies of poker experts David Sklansky and Puggy Pearson and pinpoints parallels between mate selection in guppies and stock market booms. For this edition, Mauboussin includes fresh thoughts on human cognition, management assessment, game theory, the role of intuition, and the mechanisms driving the market's mood swings, and explains what these topics tell us about smart investing.
More Than You Know is written with the professional investor in mind but extends far beyond the world of economics and finance. Mauboussin groups his essays into four parts-Investment Philosophy, Psychology of Investing, Innovation and Competitive Strategy, and Science and Complexity Theory-and he includes substantial references for further reading. A true eye-opener, More Than You Know shows how a multidisciplinary approach that pays close attention to process and the psychology of decision making offers the best chance for long-term financial results.
Conversation with Michael Mauboussin on More Than You Know
Chris DeMuth Jr:
What has changed since you wrote this important book?
I view learning very much as a journey, so naturally there's been a lot I've learned since writing that book (much of which occurred a decade ago). A few areas include quantifying the contributions of luck and skill (the theme of my latest book, The Success Equation), even more psychology as it applies to investing (including ideas such as the inside versus outside view), and more specificity on what underlies sustainable competitive advantage for a business. More specific to investing, I'd like to do more on position sizing (or what bettors call "money management").
Chris DeMuth Jr:
Are there any specific investments that you have made or would make today specifically as a result of what you learned by writing the book?
A few thoughts. First, I try to be more attuned not only to reversion to the mean, but to the rate of reversion to the mean. In the process of writing The Success Equation I learned more about that, and I think that's very useful. Having gone through the financial crisis, a number of thoughts seemed more important. One is what I call "net versus network." I was too comfortable, for example, with net derivative exposure and not attuned enough to the network of holdings. So I'll try to think more carefully about network structures and what they mean. The crisis also raises the importance of thinking about counterfactuals -- entertaining alternative possible outcomes. We are generally pretty bad at this in all but fairly superficial ways.
The one idea that I have been thinking a lot about is the role of the "interpreter" in our minds. A part of our left hemisphere (isolated through fascinating experiments with split-brain patients) is dedicated to attaching a cause to every effect that it sees. The interpreter knows nothing of luck. So we have a very difficult time understanding the role of luck and come to believe what happened is what had to happen (know as "creeping determinism").
What was most applicable for me?
Although I would recommend each of Mauboussin's books, I wanted to specifically highlight this one as the most impactful on my work. Mauboussin is a great writer because he is a great reader. "Part 1: Investment Philosophy" covers a lot of ground in terms of probability, risk, and value investing generally. "Part 2: Psychology of Investing" delves into behavioral finance. Mauboussin quotes gambling legend Puggy Pearson as saying, "Ain't only three things to gambling: Knowin' the 60-40 end of a proposition, money management, and knowin' yourself." In the world of event driven value investing, the 60-40 end of a proposition is event and security analysis. Money management is akin to position sizing and risk management. As for "knowin' yourself," this psychological element also has parallels in the investment world. I might add, "knowing yourself, especially where your characteristics and interests diverge from your counterparties".
One could have all of the analytical ability in the world and have an ideal sizing model to boot, but still not be able to invest if you cannot determine which opportunities are worth analyzing and which are worth sizing. Start at the beginning of the alphabet? There are too many securities. Focus on stocks in the news (or widely discussed on the internet)? That would probably be worse than random as you would be selecting for ideas that are, on average, in favor and closely scrutinized. Instead, we focus on opportunities to make capital market transactions with constrained counterparties. Instead of pitting our judgments against other investors, we look for investors with narrow mandates, agency problems, or extreme time-sensitivity. We try to know ourselves… especially where we differ from the circumstances of our trading partners in respect to these attributes.