Bookshelf
Expectations Investing
Reading Stock Prices for Better Returns
Expectations Investing offers a unique and powerful alternative for identifying gaps between stock price and value. Mauboussin and Rappaport provide everything the reader needs to utilize the discounted cash flow model successfully. And they add an important twist: they suggest that rather than forecasting cash flows, investors should begin by estimating the expectations embedded in a company's stock price. An investor who has a fix on the market's expectations can then assess the likelihood of expectations revisions.
To help investors anticipate such revisions, Mauboussin and Rappaport apply an “expectations infrastructure” framework to trace the process of value creation from the basic economic forces that shape a company's performance—sales, costs, and investments—to the resulting impact on value drivers.
Investors who use Expectations Investing will have a fundamentally better way to evaluate all stocks, setting them on the path to success. Managers will be able to use the book to devise, adjust, and communicate their company's strategy in light of shareholder expectations.
The revised and updated version reflects recent changes in accounting and the business landscape and provides new case studies and examples.
“In Expectations Investing, Michael Mauboussin and Al Rappaport build off the simple yet powerful observation that a company’s stock price embeds expectations. They then offer investors a rigorous method to identify gaps between what the price reflects and what is likely to happen. Truly a must have in any investor’s library.”
—Annie Duke, author of Thinking in Bets and How to Decide
“Mauboussin and Rappaport’s approach to corporate valuation is as relevant and intelligent today as ever. Understanding expectations, assessing competitive strategy, appreciating optionality, and a laser focus on cash flow will make you a more effective investor in private or public markets.”
—Bill Gurley, General Partner, Benchmark Capital
“In Expectations Investing, Michael Mauboussin and Al Rappaport break down investing into its component parts, explaining what makes for good companies and attractively-priced stocks. Which isn’t to say they make it easy. This is second-level thinking: a graduate-level course in intelligent investing.”
—Howard Marks, Chairman and Cofounder, Oaktree Capital Management, and author of The Most Important Thing
The Success Equation
Untangling Skill and Luck in Business, Sports, and Investing
What role, exactly, do skill and luck play in our successes and failures? Some games, like roulette and the lottery, are pure luck. Others, like chess, exist at the other end of the spectrum, relying almost wholly on players’ skill.
But in every other domain—from business, to investing, to sports—skill and luck seem almost hopelessly entangled.
In his provocative new book, Michael Mauboussin untangles the intricate strands of skill and luck, defines them, and provides useful frameworks for analyzing their relative contributions. He offers concrete suggestions for how to put these insights to work to your advantage in business and other dimensions of life.
Among the insights that Mauboussin reveals:
When your skill is greatest in different domains (the “arc of skill”).
Why you want to increase randomness when you’re the underdog.
Why understanding reversion to the mean is crucial.
How to find the right statistic.
Why social ties can greatly increase a product’s chances for success.
Showcasing Mauboussin’s trademark wit, insightfulness, and analytical mind, The Success Equation is a must-read for anyone seeking to make better decisions—in business and in life.
Michael J. Mauboussin is Chief Investment Strategist at Legg Mason Capital Management. He is a former president of the Consumer Analyst Group of New York and was repeatedly named to Institutional Investor's All-America Research Team. His books include Think Twice: Harnessing the Power of Counterintuition (Harvard Business Press, 2009). He has been an adjunct professor of finance at Columbia Business School since 1993 and is on the faculty of the Heilbrunn Center for Graham and Dodd Investing.
Few people acknowledge or care to accept the central role that luck plays in our lives. Michael Mauboussin not only understands the separation between skill and luck, but he also provides a mental framework to deal with the reality. This is an important read.
-Paul DePodesta, Chief Strategy Officer, Cleveland Browns
Mauboussin seems to know everything there is to know about how to skillfully disentangle skill from luck. He also knows how easy it is to botch the job and has great stories - from music studios to baseball dugouts to the New York Stock Exchange - that bring statistical abstractions to life.
-Philip Tetlock, Leonore Annenberg University Professor, Wharton School and School of Arts and Sciences, University of Pennsylvania; author, Expert Political Judgment
In The Success Equation, Michael Mauboussin helps us understand the difference between skill and luck and, importantly, how to tell how much each contributed to a given outcome. He reminds us that in fields where luck plays a big part, like investing, outcomes are of limited relevance in assessing performance. And, indispensably, he points out how important it is for practitioners "to develop an attitude of equanimity toward luck." I love that!
-Howard Marks, Chairman and cofounder, Oaktree Capital Management and author of The Most Important Thing
Think Twice
Harnessing the Power of Counterintuition
No one intentionally makes bad decisions. Yet we make them all the time. In fact, some of the worst disasters in recent history-the collapse of major investment banks, the global financial meltdown-were the result of seemingly reasonable decisions made by a lot of smart people. How does this happen?
Michael J. Mauboussin argues that the correct process for deciding well-especially when the stakes are high-conflicts with how our minds naturally work. When faced with complex situations, our brains revert to simplified patterns that obscure better approaches to the problem. Even when we think we're applying logic and reason, we're subconsciously succumbing to social or situational influences. Fortunately, we can override our mind's default systems-that is, we can counter our intuition-by learning to "think twice."
In this compelling book, Mauboussin outlines a disciplined approach to decision making that will significantly reduce costly mistakes. It involves preparing to encounter common mental traps, recognizing these mistakes in context, and applying the right mental tools to shape better decisions. With practice, you'll begin to catch poor decision making-both yours and others'-as it unfolds in front of you.
Through vivid stories from business, sports, science, and everyday life, Mauboussin categorizes common mental mistakes and offers actionable advice for avoiding them, including:
The Inside/Outside View: Take the experiences of the others into account.
Tunnel Vision: Force yourself to consider alternatives that make you uncomfortable.
The Whole Is Smarter Than Its Parts: Don't oversimplify complex problems.
Situational Power: Be highly aware of the influence others have on you.
The Expert Squeeze: Know when to trust so-called experts, and when not to.
Backed by powerful research and shrewd analysis, this book gives you a mental toolkit for spotting dangerous decision traps-and making smarter choices in your professional and personal life.
It's hard to think of a longer lever than better decision making, and today research in this area is advancing rapidly. In Think Twice, Mauboussin boils it all down into the key insights you really need in order to train yourself to make effective, stronger decisions.
-Jeff Bezos, Founder, Executive Chairman and Former President and CEO of Amazon
The leader of any organization knows that making the right call in a high-stakes situation is never easy. However, if you are aware of the complexities of the circumstances and you take the time to question your reasoning, more often than not you'll make a better decision than the guys in the other clubhouse. Mauboussin's Think Twice helps you to gain that mental edge. That's what I expect from my team, and that's why I hope my competitors don't read this book.
-Billy Beane, Manager, Oakland Athletics
Using lively prose and striking stories, Mauboussin teaches you how to think clearly and decide effectively. He wraps an insightful amalgam of memorable concepts and eminent good sense around a core of academic rigor. Rarely do enjoyment and value go so well together.
-Richard Zeckhauser, Frank P. Ramsey Professor of Political Economy, Harvard University
More Than You Know
Finding Financial Wisdom in Unconventional Places
Since its first publication, Michael J. Mauboussin's popular guide to 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, 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.
Refreshingly intelligent... engagingly shows how a multidisciplinary perspective can deepen your sense of how financial markets work.
-The Wall Street Journal
More Than You Know is a lucid explanation of the exciting new developments in behavioral economics and cognitive science on the rationality and irrationality of people's economic choices. Michael J. Mauboussin has an excellent understanding of the science of what it does and does not imply for investing, purchasing, and other real-life decisions. This book is essential reading for anyone interested in the science of human nature and its relevance to the world of finance.
-Steven Pinker, Johnstone Family Professor of Psychology, Harvard University
Wonderfully thoughtful and insightful... sophisticated and accessible, intriguing and entertaining.
-The Washington Post
