Interview With Michael Mauboussin: Masters in Business (Audio)

or relatively unknown rock star. I find the way he looks at the world, the framework uh he creates two understand finance, understand how investors behave UH to be just absolutely fascinating and tremendously, tremendously insightful. UH. He is one of the few guests that we have invited back for a second time, and truth be told, our first interview, I was pretty uh. Met is probably the the nicest thing I could say about my own performance. He's always

awesome and and I think you'll really enjoy this. So, with no further ado, here is my conversation with Michael Mobison. This is Masters in Business with Barry Ridholds on Bloomberg Radio. My special guest this week is Michael Mobisan. He is the head of Global Financial Strategies at Credit Swiss, he has quite the curriculum VITA. Previously, he was chief investment strategist at leg Mason Capital Management, working with famed investor

Bill Miller. He's been a professor at the Columbia School of Business since, where he's won numerous awards for teaching excellence, as well as being named to the Institutional Investors All Star Research Team. He is the author of a number of books, most recently The Success Equation, Untangling Skill and Luck in Business, Sports and Investing, and he is also the author of some of the most interesting white papers in all of finance. Michael Mobiso, welcome back to Bloomberg.

Thanks very awesome to do with you. So you and I know each other for a while, and I've been a fan of the sort of work you've done on a number of things. Let's let's start out with a quote of yours and see where you want to go with this. You said, perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company's fundamentals and the expectations implied by

market price. What exactly do you mean by that? Yeah, So, in order to make money in markets you have to have a belief that's different than what the market believes. And the general tendency we all have is if things are going well, we want to buy, and we know that, of course from aggregate investor behavior, and when things are going poorly, we want to sell. But the way to make money is to have a view that's different than the market. And the metaphor that works the most vividly

is the racetrack. Right. If you're a handicapper and you want to make money, there are two things that are important. One is how fast the horse is gonna run, we'll call that the fundamentals. And the second are the odds and the toweboard. And the way you make money is not picking the winner. The way you make money is picking miss price odds. And so that idea really carries over to the world investing. So I think it's most of us investors we sort of blur those two things.

And I'll mention it kind of a funny story. I was in a big money management organization. They said, is there anything we could do that would be radical you in terms of how we approached the job. I said, here's an idea for you have half your analysts only work on fundamental stuff, right, one guy just works on Apple's future, you know, sales and profits and so forth, and then have the other guy just work on the expectations what does a hundred dollar stock price mean for performance?

And then bring the two people together at the very last minute and see what happens, right, Because the problem is we tend to meld those two And I would say the great investors are those that really do think about those things separately. And I think it's a it's a real challenge for the rest of us. Again, things are going well, you want to buy it, things are going bad that you want to sell it, and you don't make those distinctions the way you should. What was

the reaction to that proposal? And they kind of they kind of said, oh, that's kind of a cool idea. Yeah, see you later, So go very far. The interesting thing is when I when I speak with the quants, when I speak with investors with a mathematical basis, they tend to do pretty much what exactly what you're saying is they have an understanding of what the fundamental metrics are, and then their quantitative overlay is here's what we've seen in price relative to value, relative to book, relative to

all these metrics. Hey, these this little subgroup looks wildly mispriced exactly, so I think the quantz I mean, this is another I'm sure we'll talk more about this, but I think the quants obviously have some of this captured in the way they approach the world, which makes enormous amounts of sense. The questions, are there things that fundamental analyst can do that quants can't do? Are there thing

nuances they can pick up that might be? And that's an interesting sub separate conversation, but right, the virtue of quants, or even even basic rules for buying and selling are precisely you take the emotion out and that you're making those two the quantity of the fundamentals and expectations too separate.

So anyone who's systematic, anyone who involved who is using some form of screening in order to help determine anybody who's using it's almost a cliche these days, but a factor or a dimension small cap value, momentum, quality, etcetera. They're using the math in order to help identify that that gulf on thing. That's right, I mean, the one thing this is a little bit off Barry, but I think this is interesting. So one of the things that I think a lot about is this idea of freestyle chess.

I don't know if we've talked about this before, have you may know this? So you know, cas Brow loses Deep Blue, and so machine beats man. Fine, But surely thereafter what what emerged with something called freestyle chess? And I means you and I are playing a match, but we can avail ourselves or whatever aids we want. So we and on computer programs you can call your lifeline to your grand master, buddy or whatever it is. And it turns out these freestyle teams are better than the

programs by themselves or of course any man or person. Right, So man plus machine beats man or machine, which is really interesting. And there's there's you know, Kevin Kelly, who's you know, just wrote a new book called The Inevitable. He's got a little section on this in the book. So this, to me is a very intriguing model to say.

Are there cases where most of the time you default to the quantitative approach or to the program, But for every now and then, if you have a good feel for the game, you can step in and do something that's a little bit different that adds value. Now that's open open question whether that's true and investing, But to me, that's a really intriguing model for thinking about what where

sort of humans and quantitative techniques may merge in the future. Well, we saw in late two thousand and seven and again a couple of years ago where all the quants kind of walking in lotstep and following their programs, and some see change took place, whether it was the financial crisis or something more recent, and even the math still got shelax. Sometimes the ground rules changed sufficiently that hey, whatever your methodology is is gonna at least temporarily be wildly out

of favor. Which leads me to an interesting question. Um, so much of this stuff is not particularly intuitive, and think twice you use the phrase counter intuition. What is counterintuition? Well, I'm not even sure that's a word. My editor said that would be a good subtitle, but no, connor intuition. The big idea think twice is when we're faced with certain types of situations, our minds are naturally gonna want to think about the problem one way when there's a

better way to think about it. Right, and so counterintuition is saying, hey, can I check myself and say I should think about it more effectively. Let me give an example to very famous one comes from Danny Kahneman, who obviously you know great psychologists, won the Nobel Price. He was our guest last week. Yeah, how is that? I gotta listen to it. He's awesome. Right, there is a fascinating story I'll share with you about about him in uh in the podcast portion, the idea is the inside.

It calls the inside versity outside of you. So, Barry, if I give you a problem, it could be anything. It could be how long will take your remodel your kitchen, how much it will cost, or how the asset class do. The classic way to think about it, See if this resonates is you gather tons of information, you combine it with your inputs and your project into the future, right and left our own devices. That's how we solve problems.

The outside view is by by contrast, is thinking about your problems in an instance of a larger reference class, basically asking what happened when other people are in this situation before. And it's a very unnatural way to think a because you have to leave aside this cherish information and be you have to find and avail yourself of this reference class. Take yourself out of yourself and look at it exactively. And let me give you an example.

It's a trivial on Let's say you are remodeling your kitchen. Right, so you sit down with the contractor, you pick out all stuff, and you're all set to go where you've gotta budget. And so the work starts and your neighbor strolls over, say, Barry, what's going on. You go, Yeah, we're remodeling your kitchen. It's gonna cost us X and it's gonna will be done by this day. What does your neighbor say to you, knowing nothing about the details? Right,

something like double the money, double the time, or something along. Right, you have all the inside view, right, you have all the ins he's just doesn't know about, but he's got the outside of you. So the point is that psychologists have demonstrated that introducing the outside of you almost always, almost invariably improves the quality of decisions. That's a classic example.

Your mind naturally goes one way. Counter intuition would tell you, let's avail ourselves with this other information and we're gonna make more accurate forecasts. And the story Danny Kneman tells is when him and a group of psychologists we're working on a textbook, and these are folks who specialize in cognitive eras and foibles of of the mind. Uh, they ended up taking far beyond what their their consensus was, and it was it was right, uh, right in the

sweet spott of what you're talking about. I'm Barry Ritolts. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Michael Mobisan. He is head of Global Financial Strategies of Credit Swiss and author of numerous books, most recently The Success Equation Untangling Skill and Luck in Business, Sports and Investing. I love that title. It's so it's so fascinating. Let's let's pull a um a phrase out of that book. And and have you discussed that. I

really enjoyed quote. Our love of stories and our need to connect cause and effect leads to all sorts of problems. The blend of those two ingredients leads us to believe that the past was inevitable and to underestimate what else might have happened. So obviously that applies to investing, but it also applies to sports and business to talk to them. Absolutely, it's a It is fascinating and bear you know when you when when an author puts down a book, you

you've been through the same process. There may be a couple of ideas that keep banging around in your head and for me, this is one of those ideas. Um. The work here was done by professor named Michael Gazzaniga, who's a neuroscientist and and he did famous work on so called split brain patients. So these are people who deabilitating epilepsy, they failed all their treatments and as the last of jeffort, they sever the corpus close from the bundle of nerves between the two hemispheres of the brain

left and the right hemisphere. And what allows the researchers to do is to figure out what what's going on each part of your brain. And to make a long story short, what they found and absolutely fascinating researches. And in your left hemisphere, which is where your language resides, there's a module they now call the interpreter, and the job of the interpreter is to close cause and effect loops. So I throw an effect at you, and this little module in your brain is gonna is gonna try to

figure out how to close the close the loop. Right, So you know, we know the future is buzzing with possibility. Everybody gets that. But once an event occurs, all of us effortlessly and naturally create a narrative to explain that outcome, right, your interpreter. And when that happens, two things kick in. The first is hindsight biases. We start to believe that we knew what was going to happen with a greater

probability than we actually did. And by the way, I cannot even count how the people have called me or emailed me to say I knew Brexit was gonna happen. So I said him, immediately, where did you write that down? Where's your pile of money from your wealth and your built right? I hear this about the financial crisis, So anybody could have told this was well, why were you long? And I'm actually exposed to banks, home builders and mortgage lenders right into the collapse if you knew it was

coming precisely. And the second thing that happens, which is related, is this idea called creeping determines that you start to believe that what happened was the only thing that could have happened, right, So this is a little module in your brain. Now, the tie back to the skill and luck stuff is that the interpreter really knows nothing about luck. So if something good happens, your mind is going to

assume that something good was behind it. And something bad happens, again, your mind's gonna make So this is a fascinating you know, we're in a world that's got a lot of randomness, a lot of luck, and we've got a little module in our brain that really struggles to understand what happened.

So so to me the idea and you know, I know, you know, one of your guests is Phil Tetlock, who was horrific, and you know, Phil talks a lot about this idea of counter factuals is being being open obviously the future different futures, but also recognizing that the past we lived through was only one of many possible pasts. That's that's a very unnatural thing to think about, but it's also a very fertile thing to think about in

terms of really understanding the complexity of the world. Warn Buffett's partner Charlie Monger is famous for saying, invert, always invert. When you're looking at a situation, Assume one of the main variables is either zero or a hundred and eighty degrees from what it is, and then see how things play out. And suddenly you end up with a very different set of possible outcomes. Uh. And and the past may not have been as as inevitable as as some

people have suggested. There there are a number of things related to this that that are really fascinating. But but let's stick with the luck issue and let's try an inversion. So, so one of your comments was luck is a residual. It's what's left over after you've subtracted skill from the outcome. So let's invert that. Uh. If after a decade, I think it's safe to say that good luck and bad luck should probably cancel out. If you're a business person, or an athlete, or a or an investor, maybe not

a dent. There'll be some outliers, but for a lot of them. So can we say that after luck cancels out, or you're left with this skill, I think that's a fair statement. Um. Now, I would say, when you think about luck. There are two different sort of categories where with luck is more independent a little bit like you described, and that would be athletes or or even money management probably realistic. But there are other other elements about luck that has a lot of a path dependence. So what

happened before effects what happens next and so forth. And when you think about the success of music sales or book sales or any sort of social products, those social effects are actually, uh, make it a little bit of a different dynamic. So yeah, yeah, the answer is yes. Over the longer the sample size, the greater the sample size, the more we can we could get a signal from skill and less important luck is. So yeah, there's no question that's the case. So index thing is as big

today as it's ever been. I think Vanguard is now coming up on four trillion dollars, black Rock is they're already. Is it safe to say that a lot of the public has looked at this process and said, you know, I'm kind of done with stock pickers. I'm just gonna index and not have to worry about it anymore. Is that a driving factor? And I think there's no question about that. And you know, for most people that's an absolutely correct prescription. Now, you know, that's an argument you

can you can't take to the extreme. In other words, not every single person can index. There has to be some act of management in some way, shape or form to basically and by the way, they're creating a positive externality, which is basically, efficient markets were good prices that the indexers can take advantage of. But for most people that's really relevant. And you know, I was just looking at

the numbers the other day. I mean, I know that Jack Bogel started the you know, his index fund in the seventies, but really for all intensive purposes, it really wasn't even going until sort of late eighties, early nineties, right, So this is a fairly new phenomenon we're seeing. And and the bulk of the assets at a place like Vanguard UH really have have come post financial crisis exactly,

So so you know, it's interesting. And the other thing to think about when you think about that dimension is that, you know, active investing the zero sum game in the sense that UH, for any particular year, the winner's positive alpha have to be offset by losers negative alpha, right, just mathematically that has to be the case. So it's interesting if you if you say, sort of an analogy is sort of the poker table, right, So we have guys sitting around the poker table playing one night of poker.

You know, if the people who are the less capable are walking out and indexing right, in effect, who's left sitting at the table the most skilled the most skilled players. So let's talk a little bit about the paradox of skill, and this sets right up the paradox of skills. So the paradox of skill, which is not my idea but I gave that name, says it at when activities have both skill and luck, which is most stuff in life.

As skill increases, luck becomes more important, which doesn't seem to make sense, but they counterintuitive way to think about this is luck has a skill has two dimensions. One is absolute skill, but the second dimension is relative skill. And that's really what it's about when you're thinking about outperforming others. And what we've also seen is a collapse of relative skill. So say the fancier way to say,

it's a standard deviation of skills gone down. So one examples in batting average in baseball or the the average batting average doesn't change all that much because it's picture hitter interaction, but the standard deviations collapse, and as a consequence, there aren't these sort of extreme hitters. No more, No more. Ted Williams, I'm Barry Ridults. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Michael Mobisan.

He is the head of Global financial Strategies at Credit Swiss, previously chief investment strategist at leg Mason, working with Bill Miller Uh Professor of Finance at Columbia Business School, and author of numerous books. Let's talk a little bit about how the great investors think and again another quote of yours, I'm gonna pull what is being wrong? Teach us about being right? It's a fascinating question. And by the way, there's a great book by Katherine Schulz basically Being Wrong.

Of that title. Here's the interesting thing, Barry. We wake up every day and think that what we believe is right. What yours in your head is what you think is right. So then you wander into the world and you're confronted with the reality that all the stuff you believe may not be right. And the real big question is how do you deal with that? Right? And so there are

some mult you and I disagree on something. There might be some ways I say, either Barry doesn't understand the facts, and if I just tell him the facts, he's going to come around to my point of view. It could be Berry's not quite smart enough to understand my nuanced point of view, or could be Berry's turned his back. You know, he doesn't get it anymore, and you know he's being, in a sense almost evil about this thing.

So I think this idea of of recognizing, especially the world of investing right where where so important, so important because what happens is I mean, what is what is rational being? What does it mean to be rational? And the answer is that your beliefs map accurately to the world. That's a real challenge if the world's constantly changing, because that requires you to change your own views. And most of us, truth be told, are fairly cognitively lazy, would

rather just sort of keep doing what we're doing. So that to me, when we say what are the characteristics, that's a big one. And being wrong teach you about being right is to say I need, yeah, I need. My map is off and I need to adjust it. The other thing I'll say, you know, you mentioned Charlie Munger a few moments ago. You know, Charlie Munger has got this great coro says, we got we did well Berkshire Health Hathway less by being brilliant and more by

not screwing up a lot. And there's a little of that effect as well. So just by not making as many mistakes, yeah, you you, you will do better over time. So I think that's another aspect of the not being

wrong dimension. You know, I'm fascinated now that we're in the midst of the political silly season, the idea of cognitive dissonance, that when a person has a wrong map and you can front them with in controvertable facts, Hey, crime is at decade lows, the number of police killed are at record lows relative to any time over the past, you know, thirty forty years. How the brain manages to either ignore the data or somehow deal with it because

otherwise their whole worldview, uh falls apart. What does that How how does that manifest itself with investors? Yeah? I think that I think that people prefer not to change their view, right, and uh so they don't even want

to entertain the evidence. But you know that if you if you said you know of conomin traversity's biases, you know, the one that probably shows up, well, maybe not the most, but certainly the top three would be confirmation bias, right, which is, once you've made a decision, you may have agonized over, but once you made a decision, you seek information that confirms your point of view. And you just

avowed dismiss or discount, as you said, disconfirming evidence. And it's a very natural thing for all of us to do. And again, I think that characteristics of great investors are those who remain actively open minded, who remain open to the evidence, and who are willing and able to change their minds when the evidence suggests that they should. By the way in life, certainly with politicians, consistency is valued is a good thing, and if you're changing your view,

you're called a flip flopper. Right in investing, if you're a flip flopper, you're if you're doing the right thing, that's what you need to do. It's not even a question of whether it's a good thing matter. So so that's another you know, that's that whole confirmation bias and this idea of consistency and the fact is once you most people have come up with a point of view, they'd much rather just stick with what they're doing than

to change their views, even if it's money losing. Even if it's money losing, that that that's quite uh, that's quite a stuff of thing. So that that leads to a related question. So what are some of the bigger misconceptions about how investors should approach the market. What should they be doing that they're not, and what shouldn't they be doing that they are. You know, if saying I say, Baron,

we talked a bit about this. For for most people, the answer is that they should probably using index funds or some sort of low cost approaches, having appropriately diversified portfolios, you know, doing all the things you're supposed to do rebalancing and tax efficiency and so forth. Right, So for for for a vast prenority people, that's probably the right

way to go. If you're going to be an active manager, I would say the key thing is to think about what is your source of edge, What do you truly believe that you can do that's different than others, right, and and then organize your investment firm in order to do that. And then finally think a lot about portfolio construction, how you put together your bets in a way that's effective. Um so those it's it's really about having a really

good process. It's also, as we were speaking a moment ago, it's about understanding and managing or mitigating the behavioral biases that are gonna inevitably show up. You know, way will avoid that, I know there is, but you try to weave this into your process. Maybe checkpoints will call them or stop points where you say, hey, am I thinking

about this properly? And the final thing I'll say, which is a big issue, is that are you in an investment organization or any kind of organization that really is helping you versus hindering you? And I think that this is something again Charlie Ellis has talked a lot about is this business versus profession? Right? When when people start getting driven by raising assets under management or selling the hot product versus delivering access returns, that changes the nature

of the basic proposition. I'm Barry Riddlts. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Michael Mobisaw. He is of Credit Swiss and author of numerous books on investing, uh, human behavior psychology. Let's let's talk a little bit about emotions and decision making. And since since you mentioned Danny Kahneman, let's let's start with with one of the big subjects and again quote from you. We all operate with certain heuristics, rules of thumb,

and predictable biases that emanate from those heuristics. Discuss Yeah, so you know Conomen and traverse ky Uh. Well, Conomen made these two incredible contributions to our understanding. One is the heuristics and biases, which we'll talk about in just

a second, and the other is prospect theory. So how human behaviors depart systematically from what economic theories would mean, meaning people on the perfect profits seeking rational machines that economists describe them as precisely, and the fact that they depart in ways that are fairly systematic and predictable. So the heuristics and biases literature is really interesting because it says that, as you point out the word as rules of thumbs, so we all we operate with lots of

rules of thumb for life. And what's good about rules of thumb? The answer is they save you a ton of time. And they're often right, keep you alive on the savannah Savanna, right. So that's all good, But the problem is that these heuristics often come with blind spots or these biases that can lead to suboptimal decisions. Let's talk about a couple of the big daddies of these biases. The first one is over confidence, and by the way, that tends to be more expressed than males and females.

So just there's that's one where there's that tend to be a difference in gender. There's a lot of data that shows that female fund managers tend to app perform male fund managers because they are not afflicted with the same sort of testosterone poisoning that leads to over over confidence exactly. So how does over confidence manifest? And you've already given a little clue on that, right, there are two things. One is we we tend to project in ranges that are too narrow. We're we we think we

understand the future much better than we actually do. Right, So that's one that's one aspect of it. The second is where you had the male female study, you decided is it men tend to trade a lot more, right, So they think they know what's going on, so they're much more active, and that just choose up performance in the form of costs. So over confidence. How do you mitigate that? The answer would be using things like base rates, which we talked about before, just saying what does the

distribution of outcomes where does it look like historically? And if I overlay that on what I'm thinking about today, is a reason for me to stretch my expectations. So that's over confidence. And that's a really a big one. And even for money managers don't trade too much. Those are that's a that's the second one. UH framing is another really big one. And so the story here buries.

If I present a story to you with mathematically one way mathematically, and then I present the same mathematical puzzle to you a different way, I can systematically get you to select one or the other right, And that just doesn't make any sense because people are actually just doing the math. They won't do it that way. So so let's let's take a look at an example of that. The one that I recall is the hypothetical UH illness, where if a doctor says bad news, you have fatal disease.

Good news is a surgery. And here's the variable if the if this doctor says six chance of survival, if you have the surgery, a huge number of people do it, and the control group gets the bad news fatal disease, good news. Hey there's a surgery. One of three people don't survive the surgery, but you know it's the only choice we have, and that generates a totally different acceptance.

Right precisely, so we're not we're not doing the math right, We're reacting with our affect or emotion because two out of three and one out of three or essentially the same numbers. If if it's one side as two out of three and the alternative is one out of three, it's the same transaction. So now you think about the world, to go out in the world and say how often are these framing effects influencing my own decisions? And you would have to guess that it's a pretty substantial amount

of the time. So can we all systematically or be good at translating these different frames into more mathematical or more appropriate framework so allow us to make the right decisions. And it goes back to our discussion a few moments ago also about storytelling. Right if there's a little causality. And by the way, I mean, I was talking to

Position about the same thing. He said. He said, you know, if I have a treatment that's fifty fifty in my office, some guy comes in with a f goes if I want the guy to use this, here's what I say, say Barry, it's do you understand that? And the guy, not the patient, nods his head say great. Last guy who's doing the treatment is doing great, and the guys like so the end of one, right, sample size of

one people will go for right. And if he says not, Barry, the last guy who's doing it didn't work so well, right, then you know basically they all so it's it's this tagline, right, which is even though the numbers are the same, Hey, it's a coin to us that that that one example, Um, you know that that kind of goes back to back

to Danny Kahneman, the whole issue of anchoring. If we toss out a number high enough when you're starting the negotiation, everybody is magically drawn because you're trying to make sense of that number and your brain lops in on it. Yeah, and anchor is another one I was going to mention and I do this with my students at Columbia Business School and it's awesome. Right. So I say to him, very first day class, I say, right down the last four digits of your phone number, right, so every no problem,

kids do that. And I say, second question, I got this from Danny directly. Uh, the number of doctors in Manhattan burro of Manhattan higher or lower than that number? Right? They usually they know it's gonna be a little bit higher. And I say, write down your estimate of the number of doctors. And just as predictable as night follows day, the people who have high phone number last, which is high, guess many more doctors, and the people will low digits

on their phone number. Right. And so a couple of things should be obvious about that number. One is they the students know there's no relationship between their phone number and the number of doctors. And had I asked those same questions in reverse order, tell me the number estimate of doctors and then tell me your phone number, you get totally different answers. So you know that this is

an effect. And I think the point that that Danny Conmon makes is that this is fairly pernicious in the sense that you can do an hour lecture on anchoring and do another experiment on it and it still works. Right. So in other words, it's like your mind. It's a really hard one for your mind to get around. And you mentioned you know, M and A, and this shows up. Fifty two weeks is high levels for the markets, all these you know, round numbers for the down all these

sorts of things show up. You know, what does what does it mean? The answer is basically nothing, but it has these sort of uh, these anchoring effects. So yeah, that's another one. So so there's a very rich literature on this. And again I say to people, really important understand it. Uh. And then as important is to try to think about are there ways again can I offset

these forces? What is the antidote two overconfidence to framing, to anchoring, and how do I try to try to bring those to bear when I need to to make good decisions. So let's talk about one of my pet peeves, which which you have discussed many times, which is I get miffed every time someone is on TV and blaming

uncertainty for the economy, the stock market for whatever. Um. I always think that's a dodge, And I really like the way you described it, uh, talking about whether or not the underlying distribution of outcome is undefined, UH, and what the risk distribution looks like. In other words, when you spin a Roulette wheel or roll a pair of dice, you may not know what numbers are going to come up, but the set of possible outcomes is well known in advance.

What is it about uncertainty that leads people to so totally misunderstand that? Yeah, I don't know, and I think that you know this is by the way, this concept that you've articulated came from Frank Knight. So it's been an idea that's been around for mathematicians. Yeah, I think it was an economist years ago. So it's been around for a long time. And you know, I think it's a debate of you know, sort of an ongoing debate

among economists and philosophers and so forth. But no, exactly what you said, So, risk is this idea that you don't know the outcome, but you know all the possible out as you said, to rule that wheel or the turn of car or what have you. And uncertainty is where we don't know the outcome, but we don't really know what the underlying distribution. So that's in character a

very very different thing. War invasion of Iraq is a good exactly, But there's some interesting I mean, even some of these things you know not seemte lab is very well known for talking about things like black swans, but you know, in reality, most things in life are really not in the black swan realm. They're more in the

gray swan realm. So for example, earthquakes, you know they follow power law, you can't really predict them, but we know what the distribution looks like, right, so you know, okay, So that so you have a sense of what's going on. So the question is whether these things are Are they practical in your day to day life. I think the answer to that is yes. But the second thing, and also I think this is an issue that we're we were in agreement on, is if you ask the question

our markets risky or our markets uncertain? Now, if they're risky, we can try out a bunch of mathematics to model them. If they're not, or they have components of uncertainty, then we're not using the right tools. And I think I would just basically say most of the standard finance is based on normal distributions. Whenever you utter phrases like alpha, beta, uh, standard deviation. Right, you're using the language of risk to describe a system which may have elements and maybe big

elements of uncertainty. So that to me is another really interesting disconnect um. And look, it may work of the time, but that one percent may be really challenging. So I think you're writing like you said, I mean, uncertainty is a phrase. It's a catch all, right, So it basically means I don't know what's going on, you throw it into uncertainty. But but I think that I found that distinction, at least personally, to be a useful one to make

as as I try to navigate the world. We've been speaking with Michael Mobison, head of Global Strategies at Credit Swiss, author of such books as The Success Equation, Think Twice and more than you know. If people want to find your writings, where's the best place for them to to either get your white papers or any of your other writings. Um, well, I have a website which is Michael Mobison dot com.

So you'll probably look up the spelling, but if you google it you'll find it probably one way or another. And um, the other thing is probably Twitter is another you know at MG Mobison, and so a bunch of the stuff tends to find its way onto Twitter one way or another. So those are probably the two best horses. If you enjoy this conversation, be sure and stick around and check out the podcast extras, where we keep the tape rolling and continue chatting about all things UH, decision

making and cognitive. Be sure and follow my daily column on Bloomberg dot com or follow me on Twitter at rit Halts. I'm Barry Rit Halts. You've been listening to Masters in Business on Bloomberg Radio. Welcome to the podcast portion. Uh, Mike, thanks so much for doing this. You know you're one of our few repeat guests. And I listened to the first, uh first podcast you and I did. You were literally one of the first dozen or so podcasts, and I have to tell you, I was awful, but you were great.

So UM, I would like to think that in the ensuing one hundred podcasts in the ensuing two years, I've developed some skill at shutting up, listening in and asking questions. Although that's arguable this there's a lot of questions that that we missed. I wanna jump back to some of them, but before I do, I have to come back to the uncertainty name. So I've been using your definition, which is based on the earlier mathematical definition. But the footnote to that that I wanted to share with you is

the reason. My belief as to why the reason people fall back on it is we talk about how our expectations map or don't to reality. My belief is that most people's sixty degree in time and space worldview doesn't map remotely close. There are just little areas where almost accidentally it's right, and we lie to ourselves so successfully that we understand otherwise how do you even cross the street. So there's this bit of subconscious self deception that allows

us to operate under normal circumstances. And there are moments of terror when it's revealed to us by the events that we really are completely um poorly mapped, let's call it that. And that's when people tried out the uncertainty defense. And you see it during financial crisis, you see it during geopolitics. It's a way of saying, all right, I will admit temporarily that I have no idea what's going on, and soon I'll be able to go back to deluding

myself that I have a good handle. And we see it anytime people talk about the future, the the confidence or lack thereof as to here's what the next six months or a year it was gonna look like. Phil Tetlock does such a great job on on taking that apart. Absolutely. You know, there's a there's a great book by Dan Gilbert and Stumbling on Happiness where he makes the point

that mentally healthy people are mildly cognitively delusional. So you are mentally healthy, you have a little bubble around yourself thinking that you, you know, know a little bit more than you do, your a little better looking than you actually are, and so forth, hence all the other confidence and yeah, exactly, and and in fact, people who are mildly clinically depressed actually have a much more accurate view

of the world than the rest of us. Now, that's very funny, and that that explains everything that's going on in Bridgewater these days. With their radical transparency, I get the sense that they probably are mildly clinically depressed, but have a more accurate view of the world. Be couse, these guys call each other out for everything, it's quite amazing. Right. So so the what's good about this mild delusion often as it gets people out of bed in the morning. Right.

So in other words, you if you think you're a little better than you are and so forth, you sort of you go at it again, and if you really had a more accurate view of the world, you might just stay in bed. But it is, it is this intriging thing. So so the key is for that that mentally healthy condition not to be debilitating your decision making it to your points. So you in the world of investing,

you do have to have an accurate map. You have to have you have to have a good belief updating system, you have to be actively open minded, you have to consider different points of view, and all those things take a lot of cognitive energy that most of us, truth be told, would rather not expend or we'd rather do

something else. Right. So so that's that's another thing. Who's what distinguishes great decision makers, not just investors, but in sports team managers or in business from the rest of us. And the answer is they tend to be those folks that are more malleable cognitively than the rest of us. In super foecasters. Tet Luck goes over the group of people who approached decision making almost with the checklist of what do we know to be true, what's relevant, what

can we rely on? Where a blind spots before they even start the process of making So any of their so cold forecasts really are just more educated guesses than the rest of us lazy civilians. Engaging. Yeah, and the other thing I liked about super forecasters is that you know they're not the folks are making those good forecasts are not geniuses. I mean, they're they're brighter than average, but they're not geniuses, right, And like you said, it's

much more about their systematic approach to making forecasts. And I think what's encouraging for the rest of us is that many of those behaviors can be emulated, many of those behaviors can be copied. Right, So so there's some hope, at least, even if I can't change anybody's I Q, that maybe we can contribute to their quality their decision making. So and better decision making would certainly go a long way. You know, I don't recall if we mentioned this last time,

but I wanted to bring it up. Did we talk about Wall Street trading desks and why they're populated with college athletes that has that? Has that ever come up with us? No? I don't think so, have you? Well, so in my experience, I've noticed half of the desks on the street people played ball in college. Have you witnessed something similar? Yeah, you're young. Yes, so it seems

like a lot of more lacrosse players. Yes, lacrosse. Um, well, usually because uh, there's only so many football, baseball, basketball players, and and but you see a lot of that, you see track. So my pet thesis on that is something that is your paradox of skill, which is, if you're playing an n c A sport, pick any division in Division one, A, Division two, any any any team can beat any other team on any other game the weekend.

It's not you know, you don't end up or you very rarely end up with a dominant team that goes sixteen and oh for the uh, you win some, you lose some. And because of the skill level is fairly that tight range like batting averages, a bad call, a lucky bounce, an injury, and any team can beat any other team in any given game. So after you worked your butt off all week and then you go and then some bead you know, bounce loses the game for you. You have to get up Monday morning and start your

routine all over again. Which describes sports as as accurately as it does working on a trading desk. I mean I buy all that. I mean I think that a lot of this athletes on trading desks. Is also the fact that, uh, they're often especially around here East Coast schools for the most part. Um also a lot of the lums. So there's a whole little pipeline, you know, in terms of what I could see the athletes you know, typically right, they work together, they were they're used to

hard discipline, team or stuff. Is true. So um, yeah, so I think that's all. I buy all that. So so let's take before we get down to our favorite questions. Let's let's let's go through some of the questions that that we missed. Um, we've we've talked. Let's let's talk a little bit about probabilities and some interesting other factors. Another quote of your success in a probabilistic field requires waiting probabilities and outcomes. That is an expected value mindset.

Why is that? Let's describe that a little bit. You know, it's a well because again, the future has many possible outcomes, and what you're really trying to do is figure out situations where you have some sort of advantage or some sort of an edge, where if you were able to play the world a lot of different times, you would win a lot more times than you would lose. And and of course there are scenarios where you would lose, but you would win many more times than you would lose.

And the question then becomes, are there ways that we can thoughtfully assign probabilities and outcomes? But I think as a structured way of approaching any almost any kind of problem, it works. Right. So you might say even a more mundane thing like yeah, you're the general manager of the Yankees now or the Mets or whatever it is, and you have to find athletes, uh to play your team. You have to draft somebody. You know, you don't really know what that guy is about. You don't really have

a completely known entity. It's a probabilistic view. But if you say, guys like this of this age and this ability have played certain way x percent have done well, right, so that's a probability and some sort of an outcome, and again they're gonna be some variance from that, but that's probably the right way to think about it. And then that allows you to understand how much you should probably wanting to pay for the guy right in terms

of contract and so forth. I think that idea spills over to most things we look at, So it's just it is just getting into this constant discipline understanding. I know the range of outcomes, I know the probabilities or some sense of those things, and I'm only gonna bet, by the way, when the odds are really good and others. I can make a lot of money if I'm right,

and I don't lose so much fun wrong. That's what made Money Bull so fascinating is the underlying expectations for the ability was not based on provable, quantified data, but all those heuristics and rule of thumbs that had basically dominated baseball for a century. And I found that book as well as the movie to be so fascinating because suddenly you have an industry that wakes up and realizes, oh, we've been doing this wrong for a century. Yeah, and Barry,

I think that this remains remarkably, remains fairly pervasive. I think it's less true and Major League Baseball because everyone's read the book and has their analytical staffs. But you look at other professional sports, by the way, you know, things like the NFL, where they're big dollars at stake, they're still doing some things that don't make a ton of sense. The NHL right where it's a much more difficult analytical task, a lot of guys making decisions that

don't make a lot of sense. So continues to be the case out there generally speaking. And a lot of it, by the way, is that people grew up with a sport, so they rely on their own experience, They rely on their own view of the world. It goes back before their frame or reference right, and they can't expand their you to understand different alternative points of view, and that can be really problematic. I am not a huge sports book fan. I find them to be predictable and tedious.

But one that I always recommend to people is the former UH coach of the Giants, Tom Conklin, did a book called Earned the Right to Win, and one of his linebackers tells the story, and this guy goes on to have an all star career and he worked with Conklin for a few years, and a lot of the athletes chafed at Conklin's version of moneyball, So he would run a whole bunch of stats. What does this team

do when it's third and one? What does this team do on on you know, first deep in their own territory. What they came up with. You're not gonna come up with every parameter people can possibly remember that, but they came up with enough of them. And this this linebacker is whose name escapes me at the moment, chafed and chafed and chafed about it, eventually adapts to the system

and sort of subconsciously adapts to it. Years later, he's traded and he's playing for a different team and it's third and one, and he says, all right, what do these guys do on third and one? And he goes, oh my god, I don't know. Conklin was right all these year year and actually reached out to him and said, hey, you're right. Sorry, I gave you grief about it. It's it's one of those things. But stop and think about how many sports haven't adapted that, and how much money

is involved. It's really quite fascinating. So speaking of not adapting and and how much money is involved. UM, I love this data point which my head of research, Mike Batnick, uncovered, and it's it's fascinating. Since two thousand and five, actually, from the period from two thousand five to two thousand thirteen, approximately fifty thousand new global funds were launched. That's not total funds. That's the number of new mutual funds, ETFs,

hedge funds, etcetera. Were launched. Fifty seven thousand. It's ten times in a number of stocks in the US. What does this tell us about our abilities to distinguish between skill and luck. I don't know if it's about skill and luck as much as it is about um the idea of marketing and raising assets. And uh, you know before we talked a few moments before about the really powerful trend and it's accelerated since the financial crisis of

a move into passive investing. And some of that's been index funds, but a lot of it's been E t f s as well. And uh, but not but there isn't t s, but there are others, so they're fun. So so I think there are a couple of things that you know, this is what Charlie Ellis talked about the difference between the profession and the business, and the professions about delivering and and Jack Bogo and others, the professions about delivering access returns. The business is about selling

people what is in demand today. And going back to even five, what happened is we had a huge run up and energy. Guess what happened. Zillions of energy funds got launched. We had gold that was hot for a while. What happened, zillions of gold funds got introduced. You know. Then then the markets go down. People go, I need given in, I need yields, and now you have yield funds. Right, So whatever worked in the last two or three years is what people want to do now, and the marketers

are more than happy to accommodate that. And that's the business, the business of finance, right and so that you know, So I mean these on on the you know, I don't even know what to say about a statistic like this is it seems mind blowing, and you know, not not a lot of these guys can have a lot

of assets and so forth. But that is marketers trying to take advantage of recent asset class performance with an overlay probably of this move to passive and and to me so so and right and for investors, I think for our listeners, the main thing we want to emphasize is that it's just be very careful about. Uh, you know what has done well in last two years is

you know again what you're gonna want. You're gonna say, hey, gee, these guys have made a lot of be careful about that idea because if it's done well or it's gone out for any particular set of circumstances, very unlikely those circumstances will repeat in the next twenty four, three, six, five years or whatever it is going forward. Mean reversion is a alive and well yep, to say the least.

Um So another quote of yours I really like, along with the suggestions you have for dealing with this, is different levels of skill and of good and bad luck are the realities that shape our lives. Yet we aren't

very good at distinguishing between the two. So that leads to, uh, the immediate question, how can we improve at at separating and identifying skill from luck, not only amongst ourselves, but at the people we hire, whether it's an investment manager or someone in a firm, a business, how can we separate skill from luck as a as a personal uh approach to the world of finance. So it's an amazing question. Uh. The first thing I would start with is sort of

the centerpiece of the book. The success equation is what we call the luck skill continuum. So you might imagine sets of activities that are all luck, no skill, right, roulet wheels, lotteries, those types of things, and you might have a system for the lottery. I have these numbers. We'll talk about that later. And then on the other extreme, UH, all skill, no luck, right, So you know, you think about Olympic sprinters, the best guy is gonna win. Luck may play a tiny role, but for the most part,

it's mostly skilled. Chess is probably over there. And then you can think about, you know, how you might even qualitatively place activities on that continuum and why you would play some And I think just that mental exercise in and of itself gives you a lot of insight. And by the way, tying into the comment on mean reversion, if you're on the luck side of the continuum, And by the way, even like performance of the markets are less from year to year, is basically random. It tells

you there's complete reversion to the mean. In other words, outcomes that are far from marverage will be followed by an outcome it's expected to be very close to the average. And and and when there's all skill, no luck, there's basically no reversion to mean at all. Right, we sprint against usine bolt, he's gonna win every time we run, right, Um, so so that's another that's another really interesting. So so then you say, well, how do we identify skill? A

couple of things come to mind on this. The first really fat. There's a fascinating strand of research by a guy named Boris Groisberg at Harvard Business School, and he wrote a book called Chasing Stars, and the idea is that when stars from one organization go to the other to another, their performance, almost without failure, degrades. Now, there could be a couple of reasons for that. The first is just classic mean reversion. So someone's been the star,

they've been lucky, and so that doesn't carry over. So okay, we'll check that one off. But the second was that people massively underestimate the role of their organization in their own success, so they think that they're the one that's carrying the weight, but in fact it's everything that's going

on around them. So that's the first thing, is just to be mindful of Hiring stars seems to be the path to quick success, but the studies on this, especially in the world of finance, demonstrate that that's actually not such a good thing. So the last thing I would say is when I if I were trying to identify skill, what I would A lot of things I would I would really want to do things that get at people's behaviors, because in interviews you tend to skim along the surface

and see if you like the person. What you really want to do is press into their actual behaviors how they actually make decisions. So if I were interviewing a portfolio manager or an analyst, I would truly want to say, like, how do you value businesses? How do you think about strategy?

Not just high level, get into the nuts and bolts of how they do that, to see what their actual processes are, what they're described their actual behaviors, and that's the best indication as to whether they're going to continue to do that. So so that's a couple of ideas. First, just the raw overarching messages is hard, right, And second is if you're gonna, if you do have someone you're trying to talk to, you is just to do as good a job as possible figuring out their actual behaviors,

not just gimming along the surface of superficial questions. And you said something else that I thought it was similarly fascinating, which was, when you're trying to determine if something is the results of skill or luck, ask yourself the simple question, can you lose on purpose? And I found that to be quite fascinating. I love that, And you know, I don't want I don't want to take credit for that either. That came from the poker the poker community, but it's

an interesting question. I I pose it to my students. On January one of every year, you say, give me twenty five stocks you're convinced will beat the SMP five. Let's get the list right, and we're gonna freeze it for the full year. Now, let's get January first. Give me the twenty five stocks you're convinced will underperform the market. You're sure you would short them with your own money, and let's tale up the results of in the year

and by the way. If you can do the latter, you can do the former, right now, So as you know, I mean, your sense on this would be, it's really hard to beat the market. It's also really hard to do worse than the market on purpose, given the same constraints, right, given the same number stocks and so on and and so forth,

you can you can do worse by treating. But that's a fascinating concept, right, And that just tells you that investing again not because of a lack of skill, rather because of a surfeit of skill, which means that everything is priced in. It's really hard to beat the market. You know. At the end of the second quarter and the first half of the year, there was a I

want to say, wool Street Journal article. I don't know if this is consistent over time, but they had noted that the first half of the lowest ranked stocks amongst the analyst community had significantly outperformed the top rank stocks and the best stocks. I wonder if that's something that's consistent over time. Yeah, I mean, and I would say that seems that feels very consistent what we know to

be the value factor. Right, So we talked about different factors that contribute to returns, and we know that over a long period of time, value factors works are basically cheap stocks we could say price to book or whatever it is, and those tend to be unloved. I mean, so that there's probably some relationship between what the analysts don't like and what's cheap, and those tend out perform. And when we say out perform, we don't mean just

you know, doing better than the market. It's adjusted for risk. Right, So these are yeah, So that's a really interesting um observation. And again it goes back to our discussion about fundamentals and expectations. Right. People want to buy what's doing well, and they want to sell what's doing poorly, and they don't distinguish between what's priced in and what's likely to unfold.

And you had also written about the morning star five star versus one star ratings and that funds that are five star come back next year they're not five star anymore. And the reverse funds that are at the bottom of the scale, the one star funds the following year, they're not ones. So what does that tell us about mean reversion? Is this just something that there's no escaping and and that's it. In the investment world. Right, So the degree to which UH investing is a luck laden activity. And

again over short periods of time, certainly a year. Uh, it's got huge doses of luck. Um As I said, it's on the luck side of the continuum. That's rapid reversion to the mean. Right. So the best estimate of the expected value some measure much closer to the average of the population. So yeah, and by the way, I mean those morning stars, you know, these morning start their forced curve. So the vast majority of company funds or three star and then the two and four less and

than one five or the extremes. So right, the best estimate for a five star once are fund the subsequent years basically three And that's roughly what we see my uh A little digression. There was a study that I give Morning Star credit for releasing it. Someone said, let's forget about the star rating and only look at one factor, and they went through all the price the book either if we can only look at one factor, what would it be? And more Star themselves discovered we look at

the cost factor of owning that funds. If you know nothing else, but by the cheapest funds you're ahead of of the five star rating, they kind of eliminated their own for existence. I think they wish that that memory of that would go away, but I seem to bring it up every six months or so. It's quite astonishing,

isn't that it is? And that's consistent with everyone we've been talking about, and you know that's That's the other thing is it's interesting when you think about fees, and look, I don't think anybody begrudges paying fees, but you know, when you're paying a fee of let's say, for an average metual fund on Hunter twenty five basis points in a world where the markets up, you know, ten fifteen percent a year as we saw nobody, it rolls right

off your back. But now when you have effectively zero real interest rates in the States, you have you know, negative overseas, never the negative overseas, and it's hard to see, you know, X returns for the equity markets vastly higher and certainly in the double digits. Uh, those those numbers

feel they sting a lot more. And then you look around and there are certain vanguard funds that are six basis points on the Admiral Institutional Clash d f A also really low fees, it becomes more and more challenging to justify. Maybe that's why there's fifty seven thousand new funds. Something will will get hot and stick, and maybe it's just part of the culling process. Hey, throw it all against the wall, see what what survives, and we can

get rid of the rest. And I don't think that's I mean, I think the fifty seven thousand numbers obviously a huge number, and that's probably what is somewhat new. But this this idea of rolling out products of what's hot is it's certainly not a not a new thing. Right. So before I get to my favorite questions, I have to ask you one more question that really sums up a lot of of what we've been talking about and

applying it to um the world of investing. So we all know who the great managers were, and and we always seem to discover these folks after their best years. Is it possible to identify skilled managers in advance? Is that something that's realistic for the average pension fund, the average institutional investor, or or are we just always chasing our tel It's a great question. I think it's really difficult to do, but there may be some things you

can do to skew the odds a bit in your favor. So, if I wanted to be optimistic or give that optimistic side of the story, a couple of things I would say. The first is going back to a discussion we had a few moments ago, which is does that investor have a thoughtful process, analytical process and portfolio construction related? Are they mindful of the behavioral issues? And do they have an organization that tends to be the proper type of organization?

But there are a couple of the things that will also skew your odds in your favor. Um. The first, interestingly is the age of the money manager, and UH research suggests that the optimal age for a money manager is in his or her early forties. Really so UM, so that's one thing. Another would be, UH, if they've gone, if they're bright people and silly, as it sounds, people that go to better schools or better SAT scores on average, or better investors. Uh. You'd like to see the size

of the fund being not too big. So we know that size tends to be challenging, so you want to be big enough to have some critical masses and the resources you need, but not so so large that you're

moving tons of money around, which makes it difficult. And the last one, which I think is still controversial, but um, but I think it's probably a heristic for something it is useful, and that's high active share, which is they're doing something quite different, right, So you're paying if you're paying someone a fee, you want them to be doing

something quite different than say the SP five index. And so if you have a couple of those things working for you, the age, they're bright people, the size is appropriate, that they're doing something different, and the process seems to be sensible. Those probably shade the odds in your favor to some degree. But as you point out, I think correctly, Um, it's difficult to to find an anticipate performance excess returns

in the future, for sure. Al Right, So in the last ten minutes or so that we have, let's let's go over um my standard questions. These were not in existence when we first did this two years ago. So, um, some of these are kind of kind of interesting. Um, how did you find your way into the financial services industry? You you come out of school with the b A and what made you attack in that direction? Well, can I tell you a very quick funny story about this.

So I was. I went to Georgetown. I was a government major, had no idea what I want to do. No I knew I needed a job, and uh one of the firms interviewed on campus with Drexel Burnham Lombert, which you may recall, was it quite a firm, quite a hot firm back in the mid nine eighties. So I did well enough of my New York Washington interviews that invited me to New York. Isn't a big deal. Get my best suit, my best tie on, and we

sit around. All the candidates sit around the table, you know, before the big day of interviews, and they say, hey, you're gonna have six interviews with different people on our program, and you get ten minutes with a head guy. Right, So obviously you want to be good all day. But that's a game for your for the day. So I go through the interviews. It's fine. I meet the big guy and you know, he's a great guy, really warm, and I sit down and I see peeking out from

underneath his death Washington Redskins, trash can. I went to went to Georgia. The riskins were good back then I'd gone to a couple of games. So I say to him, kind of off handily, hey that's a great trash can, literally,

and this triggers this guy's emotional seats. So he goes on about, you know, the virtues of athletics, and you know, metaphor for life, how much you love living in Washington, and my my ten minute interview becomes fifteen minutes and me mostly nodding up and down in agreement with everything

he said. So I go back to school a couple of weeks later, get the letter offered the jobs is awesome, start the program, and about three months into it, one of the guys pulls me aside says, hey, kid, you're doing fine, so you know it's okay, but I have to tell you that the six people who you interviewed with, who are the core of the interview process, voted against hiring you. He goes but the head guy came down and reviewed our sheets and recommendations and said, Override, you

have to hire this kid. He's great. Right, So, as I like to say, my my career was launched by a trash can, right, which is quite literally the case. And and and thankfully these more formal processes weren't in place at the time because I wouldn't have been hired. So so that was it. And and that was a really interesting experience because it was a year and a half long training program that led to be a financial advisor.

So we did a lot of classroom stuff for a liberal arts guy, tremendous, right, so basic accounting and finance and so forth, and then we rotated through about twenty different departments at Drexel Burnham, everywhere from operations to investment banking to research, all the trading desks. So if you're a person that didn't know what your future, what you were about, you're gonna find yourself right through that program.

And then I went on to be a financial advisor at drug we call them brokers back then, uh at Drexel, and was an abject failure at that job. Abject sales job as a sales job, and it was it was started in early so that was on the heels of the crash of eighty seven and Drexel at that point was in a little bit of hot water, so those were sort of mitigating factors. But basically I was not good at this at all. So fortunately I was able to figure out a little bit of what I wanted

to do. But that was my my store, my exactly, but it was it was in some ways it was a great I mean, it was a great experience for sure, but knowing what you're not good at was a wake up call to saying, like I should go off and do something different. So so that raises the next question, so who are your mentors? So in my training program, actually a guy in my group gave me a copy of a book called Creating Sheer Older Value by a

professor at Northwestern named L. Rappaport. And I was, you know, a liberal arts guy, and these guys are talking all this finance jargon. It was way over my head and actually candidly didn't make a lot of sense. That book was the first book that really made sense to me. And and and rapp reports said three things that to this day remained at my core. And I would say, he's not only a mentor, he's a dear friend and

a co author and so forth. The first was that it's not about accounting numbers, is about economic value, which is really important. And we forget that lesson but it comes it rears its head from time to time. Second is that valuation requires understanding both finance and competitive strategy intimately, so they're not Valuation and strategy are not two separate activities, which is how we teach them in business school, by the way, but really should be joined at the hip.

And the third was chapter seven called stock Market Signals for Managers, and it was the argument that stock prices reflect expectations and that a manager just investing in a way that earns the cost of cabal isn't going to get you excess returns. It's beating with the market believes, and that for me, it was a huge revelation, right, and he was His target was corporate executives, but the

relevance for investors was obvious. So I started emulating a lot of the Rappaport techniques, which are basically standard finance techniques, and a lot of my research, including deep dies on competitive strategy and a lot of valuation work. And again that's how I got to I got to meet him in the early nines, about twenty five years ago, and from then we we sort of cultivated. So he's been he has been tremendous. The other guy for me has

also been Bill Miller. And you mentioned I worked with Bill for nine years, but even going back to the early one of the early and this is before he was the famous money manager right the S and p F. This is before, this is before it was just a streak, highly unlikely random. It won't it won't get I don't think that one will be broken. But but he's also a guy who's uh, you know, very valuation focused, very

widely read guy, very multi disciplinary guy. Um and you know, a wonderful guy to just talk to and learn from. So those are a couple of guys that certainly stand out, um in terms of in terms of mentor but Rapp in terms of actually understand the business and thinking about Al Rapp Reports stands above all for me as it's just a hugely, deeply influential person. So let's talk about books. We we've mentioned a number of different books. Uh, what are some of your favorite books? Be them, be they

investing tons or otherwise just beside yours? Okay, okay, it goes without saying right, So UM, look, I mentioned already Al rapp Reports book Creating Shoulder Value, UM, which was written original version of it. A couple other books that for me been tremendously valuable. Um, Mitch Waldrop's book on Complexity. So this is the history of the of the Santa Fe Institute. So that introduced a whole sleuve ideas that were wildly influential for me. Love Robert Schildini's book Influence

of Psychology or Persuasion. That should be a must read, especially for young people. Peter Bernstein just was whatever and so whatever he writes, but the two I would mention to be against the God. I just read that. You know it can't get enough right and you should reread that. And Capital Ideas was also terrific Um and then a

couple more. Another ones a little bit off the radar for the investing world is John Gaddis's book The Landscape of History Really, and Gaddis is a professor of history Yale, And Um, this is a night it's actually a series of lectures that are written in a book. And it's the craft. It's about asking the questions about what is

the craft of history? And I think what's so interesting to me is that many of those ideas are ideas that spill right over to the world of investing as an as an as an analyst or portfolio man your how do you craft stories, how do you understand causality? How do you grapple with complexity? So gaddis wonderful and it's it's really interestingly written book. So, um, you know. And then the other one I just mentioned is is E. O. Wilson's book Consilience. We may have talked about that before,

but we have not ed. Wilson is Uh. He's a criminologists, a professor. As a professor at Harvard, he is the world's leading expert in ants. Okay, so I'm thinking of a difference. So yeah, it could be. And so and he wrote a book of years ago cults consilience, and consilience is one of these old words which means the unification of knowledge. And the argument that Wilson made in this book was, Hey, we've made enormous strides, uh in

the last few centuries by being reductionist and disciplinary. So in other words, the biologists hang out with the biologist and with business. He said, Look, the most vexing problems in our world are standing at the intersections of disciplines, and so for us to really advance, we need this concilience's unification of knowledge very much resonated with me, and

I truly believe that. And we talked about, you know, even Danny Khneman winning the Nobel Prize in economics even though he's never taught an economics class in his life, right, but what he's brought to bear something that's really useful for both psychologists and economists, right, So that intersection, and Dick Taylor, who will likely win the Nobel Prize, also operating in that intersection. But go on and on, I mean,

what can you learn from a biologist? Offline? We were talking about some of the things you listen to about musicians or comedians. What can you learn from what those guys do their creative processes their businesses that it might might apply to your creative process in your business. Gotta be stuff that's relevant, right, And so to me, that whole way of thinking and reaching outside of your own little world for ideas that may apply. Um so, so Ed Wilson's book on that is probably you know, the

great one. So my last two questions and and these are my two favorites. Some millennial comes up to you and says, hey, I'm thinking about getting into UH finance. You teach at Columbia so you must have a lot of students who occasionally say, I'm interested in finance. What

sort of advice would you give them? You know, So there there are two sides this one night classical finance, of corporate finance, mergers and acquisitions and capital raising, all that stuff is likely to continue, so that if they're

interested in that, that's fine. More of the questions I get about money management, And you know, Richard grin Old wrote this really fascinating paper twenty five years ago about the law of active management, and he basically said, we'll use English terms instead of Greek terms excess returns or

a function of your skill times your opportunity set. And that's a really interesting way to think about this, right, because you can be the most skillful person in the world, but if your opportunity set is not very attractive, you're not gonna go very far with your access returns. So one thing I just asked to encourage the students to think about is where do you think the next twenty five years things are going to be a little more exciting? Right?

Where where is the where the opportunity is going to reside? My guess is it's unlikely to be the dwive US value manager Large Camp. It's unlikely to be. It's much more likely to be somewhere in emerging markets, maybe even you know, uh, you know, Africa or parts of Asia. So to me, that would be the thing to think about is if you you're gonna lay out next years, where do you think that those, um, those excess returns

are going to be. The other thing I would say is that and you know, I think you've talked a lot about this as well. We've really moved rapidly towards quantitative methods, and the other other thing to think about is are there ways that we can meld or advanced quantitative techniques so meld them with our without what we're doing fundamentally, So so some blend of those two techniques or advanced un quantitative So that if you said, where

is the future going? To me, I think these quantitative techniques are certainly not going to uh be rolled back. I think we're going to continue to see that advancement. And our final question, what is it that you know about investing today that you wish you knew when you began in the nineteen eighties? Geez, A lot of things, But the first is I mean, we really have. The complexion of the market has changed a great deal. When I started thirty years ago, indexing was less than one

percent of assets under management. By the way we looked this up, the equity US equity mutual fund industry assets under management were hundred and thirty five billion. Wow, that's amazing. It's just mind boggling. In thirties decent sized funds. Decent size fund today, Isn't it remarkable? So the whole complexion has changed a great deal. But there are a couple

of things that I would note. One is that that phenomenon, so we've gone from basically a standstill to thirty five percentage something like that that's passive or index So that's a big change. The other fascinating change is that, um most fun were single managed by one person about years ago. That's now down about most teams. Yeah, their team run, which is it? Truly That's another really big change and

what's going on. And I think the other thing is just the level of skill has gone up, and going back to our discussion on the paradox of skill, we've never seen more skill than we have today, and that has made it much more difficult to outperform the market. So I mean it's it's always exciting, as you point out, because there's always something going on, the world is always changing.

What's deeply fascinating about this business is you've never figured it out right because the world is always changing and it requires you to keep up with what's going on. But those are some of the really big changes the backdrop that I think make it all so fascinating. We have been speaking with Michael Mobison of Credit Swiss. Mike, thanks for being so generous with your time. This has

been absolutely fascinating. If you enjoy this conversation, be showing look Up an Inch or Down an Inch on Apple iTunes and you could see any of the other one hundred uh such episodes that we have had. UH be sure and check out Mike's white papers, books, et cetera. You can find that at Michael Mobison dot com. I would be remiss if I did not thank uh the hard work of the team who helped put this together. Uh. Taylor Riggs is my producer, booker Charlie Bohmer, and Today

Guests recording engineer David Uh. Mike Batnick is our head of research. We love your comments feedbacks, questions and suggestions. Be sure and write to us at our new email address, m IB podcast at bloomberg dot net. I'm Barry Ritults. You've been listening to Masters in Business on Bloomberg Radio