Belated Book Review (Investments.)

Yet Another Belated Book Review: More Than You Know, by Michael J. Mauboussin (2006.  Columbia University Press.)

This text begins with a quote from Edward O. Wilson that talks about the fallibility and inability to escape human nature that affects even the most staid and structured everywhere, including money centers where strict regimen are the rule of the day. Prof. Mauboussin in this text as well popularizes the idea of using “mental models” in the investment process and talks briefly about his first learning of it and then teaching it to his students, and continuing related work through the Santa Fe Institute. Mental models in investing apparently have more to do with determining different factors for achieving investment goals and then carrying them out versus going on a “gut feeling” or waiting for the world (essentially other market participants,) to make a mistake or mistakes, and this among other approaches as well.

The author does seriously tell the reader that each investor with a constructive strategy or even an investment idea needs a philosophy that overrides and takes into account the modern computer modeling approach to asset allocation, trading and so on. These different philosophies today are all probablistic and consist primarily of traders or gamblers, so – called handicapping as a way to make a safe bet on stocks and other securities, and what we know as the mundane practice of ordinary investing, actually the opposite of gambling. The narrative explores the approaches of investment process versus outcome in that processes are determined through applied and tested investment theory and problem solving whereas outcomes are, again, derivative of gambling behaviour more or less. The author argues in this world of short – term investment scoring that there is too much randomness and chaos without taking a longer – term perspective on stocks and other securities.

Investment philosophies are less important more recently as husbanding and growing assets has less appeal these days than immediate shareholder returns, not as derived from the trading behaviour of investors but of investment players, or money managers. The text proposes such managers or players are not winners, and despite the apparent brilliance of the players, a guiding philosophy outdoes this brilliance any day. In short, if you do not have an investment philosophy as a guide, find one! Remember as well the short – term emphasis today in the financial markets is not upon an investment process as structured and well – defined and working, but it is the shorter and shorter – term outcomes that are dwelt upon.

For some, needless, to mention here the investment process that Prof. Mauboussin defines for us in the text, and that is perhaps the most understandable for everyone is the value strategy that identifies under – priced securities. The author reminds us as well as his readers that investment fundamentals should not be equated with expectations. Investment processes that are good ones consider things like probabilities and payoffs where the consensus securities price is powerful and maybe popular at the same time, but might be wrong. Former U.S. Treasury Secretary Robert Rubin is quoted in the book as one who advocated a structured analysis and solution to things like investment process of which certain priorities including things like uncertainty, probablistic considerations, deciding and acting on decisions when faced with asymmetry and imperfect information, and rewards not just based on results but on the accomplishment process as well.

Different points are illustrated in the text, including the sort of scouting investors need to do when looking into different securities, creating an investment game – plan, and that it is very difficult to beat the market, especially when stocks are going up as the market has actually few weaknesses. The author examines securities selection criteria along with different measures of portfolio and asset performance for evaluating success in investing. For simplicity, the text concentrates mostly on the universe of U.S. Stocks that have several money and financial centers. The point is made the markets are ruled from different financial centers in America, not just New York and Boston by those in the investing profession that maximizes long – term returns for third party stakeholders, versus those in the investment business that maximize earnings for their banking firms. The text goes on to illustrate various investment axioms, truisms, and other observable principles about the markets, including things like hubris, risk assessment and risk – taking, winning and losing streaks, the element of the long – term in accomplishing investment goals, market psychology, the difficulties with consistently achieving higher returns, basic investment rules, the role of technology in the securities markets, working with others on your projects to have capital and other gains, and dealing with the overall ups and downs of the markets, even in the long – term. Overall an excellent read.