WEBVTT - Interview With Michael Mauboussin: Masters in Business (Audio) 0:00:03.400 --> 0:00:06.760 This week on the podcast, we have a special repeat guest, 0:00:06.840 --> 0:00:10.200 and he is one of my favorite people in finance. 0:00:10.720 --> 0:00:13.680 His name is Michael Mobisan and he is the chief 0:00:13.720 --> 0:00:17.319 strategist at Credit Swiss First Boston. UH. He used to 0:00:17.360 --> 0:00:20.920 work with Bill Miller over at leg Mason, who actually 0:00:21.000 --> 0:00:25.680 very recently just bought himself private. I really love the 0:00:25.720 --> 0:00:29.600 work of Mobisan. He I think he is a unknown 0:00:29.760 --> 0:00:33.440 or relatively unknown rock star. I find the way he 0:00:34.479 --> 0:00:38.160 looks at the world, the framework uh he creates two 0:00:39.000 --> 0:00:43.760 understand finance, understand how investors behave UH to be just 0:00:43.880 --> 0:00:49.080 absolutely fascinating and tremendously, tremendously insightful. UH. He is one 0:00:49.080 --> 0:00:52.080 of the few guests that we have invited back for 0:00:52.120 --> 0:00:55.400 a second time, and truth be told, our first interview, 0:00:55.520 --> 0:01:00.400 I was pretty uh. Met is probably the the nicest 0:01:00.400 --> 0:01:02.800 thing I could say about my own performance. He's always 0:01:02.800 --> 0:01:05.600 awesome and and I think you'll really enjoy this. So, 0:01:06.040 --> 0:01:10.640 with no further ado, here is my conversation with Michael Mobison. 0:01:14.040 --> 0:01:18.360 This is Masters in Business with Barry Ridholds on Bloomberg Radio. 0:01:19.240 --> 0:01:23.000 My special guest this week is Michael Mobisan. He is 0:01:23.040 --> 0:01:26.960 the head of Global Financial Strategies at Credit Swiss, he 0:01:27.040 --> 0:01:31.560 has quite the curriculum VITA. Previously, he was chief investment 0:01:31.600 --> 0:01:36.520 strategist at leg Mason Capital Management, working with famed investor 0:01:37.000 --> 0:01:39.800 Bill Miller. He's been a professor at the Columbia School 0:01:39.800 --> 0:01:45.440 of Business since, where he's won numerous awards for teaching excellence, 0:01:46.080 --> 0:01:50.000 as well as being named to the Institutional Investors All 0:01:50.080 --> 0:01:53.840 Star Research Team. He is the author of a number 0:01:53.880 --> 0:01:58.480 of books, most recently The Success Equation, Untangling Skill and 0:01:58.600 --> 0:02:02.720 Luck in Business, Sports and Investing, and he is also 0:02:02.840 --> 0:02:06.840 the author of some of the most interesting white papers 0:02:06.840 --> 0:02:10.360 in all of finance. Michael Mobiso, welcome back to Bloomberg. 0:02:10.480 --> 0:02:13.720 Thanks very awesome to do with you. So you and 0:02:13.760 --> 0:02:15.440 I know each other for a while, and I've been 0:02:15.440 --> 0:02:18.040 a fan of the sort of work you've done on 0:02:18.160 --> 0:02:21.280 a number of things. Let's let's start out with a 0:02:21.400 --> 0:02:24.440 quote of yours and see where you want to go 0:02:24.520 --> 0:02:29.120 with this. You said, perhaps the single greatest error in 0:02:29.160 --> 0:02:33.200 the investment business is a failure to distinguish between the 0:02:33.280 --> 0:02:37.919 knowledge of a company's fundamentals and the expectations implied by 0:02:38.000 --> 0:02:41.560 market price. What exactly do you mean by that? Yeah, So, 0:02:41.720 --> 0:02:44.320 in order to make money in markets you have to 0:02:44.360 --> 0:02:46.960 have a belief that's different than what the market believes. 0:02:47.040 --> 0:02:51.360 And the general tendency we all have is if things 0:02:51.400 --> 0:02:54.000 are going well, we want to buy, and we know that, 0:02:54.040 --> 0:02:57.040 of course from aggregate investor behavior, and when things are 0:02:57.040 --> 0:02:59.799 going poorly, we want to sell. But the way to 0:02:59.840 --> 0:03:01.640 make money is to have a view that's different than 0:03:01.639 --> 0:03:04.400 the market. And the metaphor that works the most vividly 0:03:04.760 --> 0:03:07.240 is the racetrack. Right. If you're a handicapper and you 0:03:07.240 --> 0:03:09.400 want to make money, there are two things that are important. 0:03:09.800 --> 0:03:11.760 One is how fast the horse is gonna run, we'll 0:03:11.800 --> 0:03:14.240 call that the fundamentals. And the second are the odds 0:03:14.280 --> 0:03:16.840 and the toweboard. And the way you make money is 0:03:16.880 --> 0:03:19.400 not picking the winner. The way you make money is 0:03:19.440 --> 0:03:23.000 picking miss price odds. And so that idea really carries 0:03:23.040 --> 0:03:24.880 over to the world investing. So I think it's most 0:03:24.880 --> 0:03:27.519 of us investors we sort of blur those two things. 0:03:28.040 --> 0:03:29.639 And I'll mention it kind of a funny story. I 0:03:29.919 --> 0:03:32.560 was in a big money management organization. They said, is 0:03:32.600 --> 0:03:34.160 there anything we could do that would be radical you 0:03:34.160 --> 0:03:36.680 in terms of how we approached the job. I said, 0:03:36.720 --> 0:03:39.520 here's an idea for you have half your analysts only 0:03:39.560 --> 0:03:43.240 work on fundamental stuff, right, one guy just works on 0:03:43.320 --> 0:03:46.960 Apple's future, you know, sales and profits and so forth, 0:03:47.200 --> 0:03:49.000 and then have the other guy just work on the 0:03:49.080 --> 0:03:53.119 expectations what does a hundred dollar stock price mean for performance? 0:03:53.560 --> 0:03:55.560 And then bring the two people together at the very 0:03:55.640 --> 0:03:58.560 last minute and see what happens, right, Because the problem 0:03:58.600 --> 0:04:00.480 is we tend to meld those two And I would 0:04:00.520 --> 0:04:03.920 say the great investors are those that really do think 0:04:03.960 --> 0:04:05.920 about those things separately. And I think it's a it's 0:04:05.920 --> 0:04:08.520 a real challenge for the rest of us. Again, things 0:04:08.560 --> 0:04:10.080 are going well, you want to buy it, things are 0:04:10.080 --> 0:04:11.200 going bad that you want to sell it, and you 0:04:11.200 --> 0:04:13.200 don't make those distinctions the way you should. What was 0:04:13.240 --> 0:04:15.320 the reaction to that proposal? And they kind of they 0:04:15.360 --> 0:04:17.360 kind of said, oh, that's kind of a cool idea. Yeah, 0:04:17.440 --> 0:04:21.760 see you later, So go very far. The interesting thing 0:04:21.880 --> 0:04:25.040 is when I when I speak with the quants, when 0:04:25.080 --> 0:04:29.120 I speak with investors with a mathematical basis, they tend 0:04:29.160 --> 0:04:32.880 to do pretty much what exactly what you're saying is 0:04:33.240 --> 0:04:35.880 they have an understanding of what the fundamental metrics are, 0:04:36.279 --> 0:04:39.719 and then their quantitative overlay is here's what we've seen 0:04:39.720 --> 0:04:42.080 in price relative to value, relative to book, relative to 0:04:42.120 --> 0:04:46.839 all these metrics. Hey, these this little subgroup looks wildly 0:04:46.880 --> 0:04:49.680 mispriced exactly, so I think the quantz I mean, this 0:04:49.720 --> 0:04:51.280 is another I'm sure we'll talk more about this, but 0:04:51.320 --> 0:04:54.520 I think the quants obviously have some of this captured 0:04:54.560 --> 0:04:56.520 in the way they approach the world, which makes enormous 0:04:56.520 --> 0:04:59.560 amounts of sense. The questions, are there things that fundamental 0:04:59.600 --> 0:05:02.800 analyst can do that quants can't do? Are there thing 0:05:02.960 --> 0:05:04.920 nuances they can pick up that might be? And that's 0:05:04.920 --> 0:05:08.440 an interesting sub separate conversation, but right, the virtue of quants, 0:05:08.480 --> 0:05:12.080 or even even basic rules for buying and selling are 0:05:12.120 --> 0:05:14.599 precisely you take the emotion out and that you're making 0:05:14.600 --> 0:05:17.799 those two the quantity of the fundamentals and expectations too separate. 0:05:17.880 --> 0:05:20.719 So anyone who's systematic, anyone who involved who is using 0:05:20.800 --> 0:05:24.600 some form of screening in order to help determine anybody 0:05:24.640 --> 0:05:27.720 who's using it's almost a cliche these days, but a 0:05:27.760 --> 0:05:32.880 factor or a dimension small cap value, momentum, quality, etcetera. 0:05:33.400 --> 0:05:36.719 They're using the math in order to help identify that 0:05:36.720 --> 0:05:38.720 that gulf on thing. That's right, I mean, the one 0:05:38.720 --> 0:05:40.120 thing this is a little bit off Barry, but I 0:05:40.160 --> 0:05:42.120 think this is interesting. So one of the things that 0:05:42.200 --> 0:05:44.440 I think a lot about is this idea of freestyle chess. 0:05:44.440 --> 0:05:45.919 I don't know if we've talked about this before, have 0:05:46.360 --> 0:05:48.640 you may know this? So you know, cas Brow loses 0:05:48.680 --> 0:05:52.800 Deep Blue, and so machine beats man. Fine, But surely 0:05:52.839 --> 0:05:55.960 thereafter what what emerged with something called freestyle chess? And 0:05:56.000 --> 0:05:57.520 I means you and I are playing a match, but 0:05:57.680 --> 0:05:59.800 we can avail ourselves or whatever aids we want. So 0:05:59.800 --> 0:06:02.120 we and on computer programs you can call your lifeline 0:06:02.120 --> 0:06:04.520 to your grand master, buddy or whatever it is. And 0:06:04.560 --> 0:06:08.159 it turns out these freestyle teams are better than the 0:06:08.240 --> 0:06:12.400 programs by themselves or of course any man or person. Right, 0:06:12.880 --> 0:06:16.159 So man plus machine beats man or machine, which is 0:06:16.200 --> 0:06:19.239 really interesting. And there's there's you know, Kevin Kelly, who's 0:06:19.320 --> 0:06:20.920 you know, just wrote a new book called The Inevitable. 0:06:21.000 --> 0:06:22.520 He's got a little section on this in the book. 0:06:22.720 --> 0:06:25.479 So this, to me is a very intriguing model to say. 0:06:25.680 --> 0:06:29.279 Are there cases where most of the time you default 0:06:29.320 --> 0:06:33.000 to the quantitative approach or to the program, But for 0:06:33.080 --> 0:06:34.520 every now and then, if you have a good feel 0:06:34.560 --> 0:06:36.120 for the game, you can step in and do something 0:06:36.200 --> 0:06:38.159 that's a little bit different that adds value. Now that's 0:06:38.360 --> 0:06:40.520 open open question whether that's true and investing, But to me, 0:06:40.600 --> 0:06:45.040 that's a really intriguing model for thinking about what where 0:06:45.040 --> 0:06:49.920 sort of humans and quantitative techniques may merge in the future. Well, 0:06:50.040 --> 0:06:53.400 we saw in late two thousand and seven and again 0:06:54.360 --> 0:06:56.640 a couple of years ago where all the quants kind 0:06:56.640 --> 0:07:00.760 of walking in lotstep and following their programs, and some 0:07:00.839 --> 0:07:04.240 see change took place, whether it was the financial crisis 0:07:04.279 --> 0:07:07.679 or something more recent, and even the math still got shelax. 0:07:07.839 --> 0:07:12.080 Sometimes the ground rules changed sufficiently that hey, whatever your 0:07:12.240 --> 0:07:16.480 methodology is is gonna at least temporarily be wildly out 0:07:16.480 --> 0:07:19.800 of favor. Which leads me to an interesting question. Um, 0:07:19.960 --> 0:07:23.640 so much of this stuff is not particularly intuitive, and 0:07:23.760 --> 0:07:29.800 think twice you use the phrase counter intuition. What is counterintuition? Well, 0:07:29.800 --> 0:07:33.040 I'm not even sure that's a word. My editor said 0:07:33.040 --> 0:07:35.360 that would be a good subtitle, but no, connor intuition. 0:07:35.600 --> 0:07:38.680 The big idea think twice is when we're faced with 0:07:38.720 --> 0:07:41.720 certain types of situations, our minds are naturally gonna want 0:07:41.720 --> 0:07:44.440 to think about the problem one way when there's a 0:07:44.480 --> 0:07:47.360 better way to think about it. Right, and so counterintuition 0:07:47.440 --> 0:07:49.640 is saying, hey, can I check myself and say I 0:07:49.640 --> 0:07:52.160 should think about it more effectively. Let me give an 0:07:52.200 --> 0:07:54.920 example to very famous one comes from Danny Kahneman, who 0:07:54.960 --> 0:07:57.840 obviously you know great psychologists, won the Nobel Price. He 0:07:58.200 --> 0:08:00.200 was our guest last week. Yeah, how is that? I 0:08:00.240 --> 0:08:03.240 gotta listen to it. He's awesome. Right, there is a 0:08:03.240 --> 0:08:06.600 fascinating story I'll share with you about about him in 0:08:06.800 --> 0:08:09.600 uh in the podcast portion, the idea is the inside. 0:08:09.600 --> 0:08:11.680 It calls the inside versity outside of you. So, Barry, 0:08:11.680 --> 0:08:13.160 if I give you a problem, it could be anything. 0:08:13.200 --> 0:08:15.320 It could be how long will take your remodel your kitchen, 0:08:15.320 --> 0:08:17.120 how much it will cost, or how the asset class do. 0:08:17.280 --> 0:08:18.840 The classic way to think about it, See if this 0:08:18.920 --> 0:08:21.440 resonates is you gather tons of information, you combine it 0:08:21.440 --> 0:08:23.320 with your inputs and your project into the future, right 0:08:23.360 --> 0:08:25.800 and left our own devices. That's how we solve problems. 0:08:26.080 --> 0:08:29.320 The outside view is by by contrast, is thinking about 0:08:29.320 --> 0:08:31.880 your problems in an instance of a larger reference class, 0:08:32.280 --> 0:08:34.480 basically asking what happened when other people are in this 0:08:34.520 --> 0:08:36.480 situation before. And it's a very unnatural way to think 0:08:36.480 --> 0:08:38.600 a because you have to leave aside this cherish information 0:08:38.960 --> 0:08:40.959 and be you have to find and avail yourself of 0:08:41.000 --> 0:08:43.520 this reference class. Take yourself out of yourself and look 0:08:43.559 --> 0:08:45.960 at it exactively. And let me give you an example. 0:08:45.960 --> 0:08:48.120 It's a trivial on Let's say you are remodeling your kitchen. Right, 0:08:48.120 --> 0:08:49.560 so you sit down with the contractor, you pick out 0:08:49.559 --> 0:08:51.240 all stuff, and you're all set to go where you've 0:08:51.240 --> 0:08:53.840 gotta budget. And so the work starts and your neighbor 0:08:54.040 --> 0:08:56.040 strolls over, say, Barry, what's going on. You go, Yeah, 0:08:56.120 --> 0:08:58.400 we're remodeling your kitchen. It's gonna cost us X and 0:08:58.440 --> 0:09:00.280 it's gonna will be done by this day. What does 0:09:00.320 --> 0:09:02.600 your neighbor say to you, knowing nothing about the details? Right, 0:09:03.240 --> 0:09:06.679 something like double the money, double the time, or something along. Right, 0:09:06.960 --> 0:09:08.840 you have all the inside view, right, you have all 0:09:08.880 --> 0:09:11.439 the ins he's just doesn't know about, but he's got 0:09:11.440 --> 0:09:13.679 the outside of you. So the point is that psychologists 0:09:13.679 --> 0:09:16.560 have demonstrated that introducing the outside of you almost always, 0:09:16.640 --> 0:09:20.240 almost invariably improves the quality of decisions. That's a classic example. 0:09:20.320 --> 0:09:24.040 Your mind naturally goes one way. Counter intuition would tell you, 0:09:24.160 --> 0:09:26.640 let's avail ourselves with this other information and we're gonna 0:09:26.640 --> 0:09:29.760 make more accurate forecasts. And the story Danny Kneman tells 0:09:29.880 --> 0:09:33.040 is when him and a group of psychologists we're working 0:09:33.080 --> 0:09:37.000 on a textbook, and these are folks who specialize in 0:09:37.280 --> 0:09:42.920 cognitive eras and foibles of of the mind. Uh, they 0:09:43.080 --> 0:09:46.520 ended up taking far beyond what their their consensus was, 0:09:46.679 --> 0:09:49.920 and it was it was right, uh, right in the 0:09:49.960 --> 0:09:52.880 sweet spott of what you're talking about. I'm Barry Ritolts. 0:09:53.160 --> 0:09:56.720 You're listening to Masters in Business on Bloomberg Radio. My 0:09:56.800 --> 0:10:00.280 special guest today is Michael Mobisan. He is head of 0:10:00.280 --> 0:10:05.200 Global Financial Strategies of Credit Swiss and author of numerous books, 0:10:05.679 --> 0:10:11.319 most recently The Success Equation Untangling Skill and Luck in Business, 0:10:11.400 --> 0:10:14.600 Sports and Investing. I love that title. It's so it's 0:10:14.640 --> 0:10:18.560 so fascinating. Let's let's pull a um a phrase out 0:10:18.559 --> 0:10:21.400 of that book. And and have you discussed that. I 0:10:21.440 --> 0:10:25.600 really enjoyed quote. Our love of stories and our need 0:10:25.679 --> 0:10:30.000 to connect cause and effect leads to all sorts of problems. 0:10:30.320 --> 0:10:32.920 The blend of those two ingredients leads us to believe 0:10:33.400 --> 0:10:38.440 that the past was inevitable and to underestimate what else 0:10:38.920 --> 0:10:43.000 might have happened. So obviously that applies to investing, but 0:10:43.040 --> 0:10:47.199 it also applies to sports and business to talk to them. Absolutely, 0:10:47.240 --> 0:10:49.400 it's a It is fascinating and bear you know when 0:10:49.440 --> 0:10:51.560 you when when an author puts down a book, you 0:10:51.559 --> 0:10:53.400 you've been through the same process. There may be a 0:10:53.440 --> 0:10:55.319 couple of ideas that keep banging around in your head 0:10:55.720 --> 0:10:58.440 and for me, this is one of those ideas. Um. 0:10:58.480 --> 0:11:01.439 The work here was done by professor named Michael Gazzaniga, 0:11:01.520 --> 0:11:04.120 who's a neuroscientist and and he did famous work on 0:11:04.200 --> 0:11:06.240 so called split brain patients. So these are people who 0:11:06.320 --> 0:11:09.000 deabilitating epilepsy, they failed all their treatments and as the 0:11:09.080 --> 0:11:11.000 last of jeffort, they sever the corpus close from the 0:11:11.000 --> 0:11:13.240 bundle of nerves between the two hemispheres of the brain 0:11:14.360 --> 0:11:16.439 left and the right hemisphere. And what allows the researchers 0:11:16.480 --> 0:11:18.480 to do is to figure out what what's going on 0:11:18.559 --> 0:11:20.480 each part of your brain. And to make a long 0:11:20.520 --> 0:11:23.400 story short, what they found and absolutely fascinating researches. And 0:11:23.400 --> 0:11:25.880 in your left hemisphere, which is where your language resides, 0:11:26.200 --> 0:11:28.760 there's a module they now call the interpreter, and the 0:11:28.840 --> 0:11:31.640 job of the interpreter is to close cause and effect loops. 0:11:31.679 --> 0:11:33.640 So I throw an effect at you, and this little 0:11:33.679 --> 0:11:35.360 module in your brain is gonna is gonna try to 0:11:35.360 --> 0:11:37.840 figure out how to close the close the loop. Right, 0:11:38.760 --> 0:11:42.040 So you know, we know the future is buzzing with possibility. 0:11:42.080 --> 0:11:45.080 Everybody gets that. But once an event occurs, all of 0:11:45.160 --> 0:11:49.080 us effortlessly and naturally create a narrative to explain that outcome, right, 0:11:49.120 --> 0:11:52.120 your interpreter. And when that happens, two things kick in. 0:11:52.200 --> 0:11:54.920 The first is hindsight biases. We start to believe that 0:11:54.960 --> 0:11:56.920 we knew what was going to happen with a greater 0:11:56.960 --> 0:11:58.720 probability than we actually did. And by the way, I 0:11:58.760 --> 0:12:01.400 cannot even count how the people have called me or 0:12:01.480 --> 0:12:05.320 emailed me to say I knew Brexit was gonna happen. 0:12:06.480 --> 0:12:08.760 So I said him, immediately, where did you write that down? 0:12:09.400 --> 0:12:12.079 Where's your pile of money from your wealth and your 0:12:12.080 --> 0:12:15.120 built right? I hear this about the financial crisis, So 0:12:15.240 --> 0:12:18.199 anybody could have told this was well, why were you long? 0:12:18.480 --> 0:12:21.800 And I'm actually exposed to banks, home builders and mortgage 0:12:21.840 --> 0:12:24.440 lenders right into the collapse if you knew it was 0:12:24.520 --> 0:12:27.480 coming precisely. And the second thing that happens, which is related, 0:12:27.640 --> 0:12:29.599 is this idea called creeping determines that you start to 0:12:29.600 --> 0:12:31.320 believe that what happened was the only thing that could 0:12:31.320 --> 0:12:33.360 have happened, right, So this is a little module in 0:12:33.400 --> 0:12:35.520 your brain. Now, the tie back to the skill and 0:12:35.600 --> 0:12:38.640 luck stuff is that the interpreter really knows nothing about luck. 0:12:38.720 --> 0:12:41.559 So if something good happens, your mind is going to 0:12:41.640 --> 0:12:44.480 assume that something good was behind it. And something bad happens, again, 0:12:44.520 --> 0:12:47.000 your mind's gonna make So this is a fascinating you know, 0:12:47.000 --> 0:12:48.800 we're in a world that's got a lot of randomness, 0:12:48.880 --> 0:12:50.720 a lot of luck, and we've got a little module 0:12:50.760 --> 0:12:53.080 in our brain that really struggles to understand what happened. 0:12:53.080 --> 0:12:54.840 So so to me the idea and you know, I know, 0:12:54.880 --> 0:12:56.480 you know, one of your guests is Phil Tetlock, who 0:12:56.520 --> 0:12:58.520 was horrific, and you know, Phil talks a lot about 0:12:58.559 --> 0:13:01.080 this idea of counter factuals is being being open obviously 0:13:01.120 --> 0:13:04.720 the future different futures, but also recognizing that the past 0:13:04.800 --> 0:13:07.240 we lived through was only one of many possible pasts. 0:13:07.400 --> 0:13:09.760 That's that's a very unnatural thing to think about, but 0:13:09.800 --> 0:13:11.439 it's also a very fertile thing to think about in 0:13:11.559 --> 0:13:14.040 terms of really understanding the complexity of the world. Warn 0:13:14.040 --> 0:13:19.000 Buffett's partner Charlie Monger is famous for saying, invert, always invert. 0:13:19.280 --> 0:13:21.840 When you're looking at a situation, Assume one of the 0:13:21.880 --> 0:13:25.160 main variables is either zero or a hundred and eighty 0:13:25.200 --> 0:13:27.760 degrees from what it is, and then see how things 0:13:27.800 --> 0:13:29.880 play out. And suddenly you end up with a very 0:13:29.960 --> 0:13:34.000 different set of possible outcomes. Uh. And and the past 0:13:34.200 --> 0:13:36.800 may not have been as as inevitable as as some 0:13:36.840 --> 0:13:40.320 people have suggested. There there are a number of things 0:13:40.520 --> 0:13:43.280 related to this that that are really fascinating. But but 0:13:43.440 --> 0:13:48.760 let's stick with the luck issue and let's try an inversion. So, 0:13:48.760 --> 0:13:52.160 so one of your comments was luck is a residual. 0:13:52.559 --> 0:13:56.320 It's what's left over after you've subtracted skill from the outcome. 0:13:56.640 --> 0:14:01.000 So let's invert that. Uh. If after a decade, I 0:14:01.040 --> 0:14:02.880 think it's safe to say that good luck and bad 0:14:02.920 --> 0:14:06.000 luck should probably cancel out. If you're a business person, 0:14:06.160 --> 0:14:10.040 or an athlete, or a or an investor, maybe not 0:14:10.200 --> 0:14:13.280 a dent. There'll be some outliers, but for a lot 0:14:13.360 --> 0:14:17.840 of them. So can we say that after luck cancels out, 0:14:17.960 --> 0:14:19.800 or you're left with this skill, I think that's a 0:14:19.800 --> 0:14:22.240 fair statement. Um. Now, I would say, when you think 0:14:22.240 --> 0:14:24.680 about luck. There are two different sort of categories where 0:14:24.720 --> 0:14:27.240 with luck is more independent a little bit like you described, 0:14:27.280 --> 0:14:29.680 and that would be athletes or or even money management 0:14:29.680 --> 0:14:33.360 probably realistic. But there are other other elements about luck 0:14:33.360 --> 0:14:35.040 that has a lot of a path dependence. So what 0:14:35.120 --> 0:14:37.560 happened before effects what happens next and so forth. And 0:14:37.560 --> 0:14:40.120 when you think about the success of music sales or 0:14:40.160 --> 0:14:43.520 book sales or any sort of social products, those social 0:14:43.600 --> 0:14:46.480 effects are actually, uh, make it a little bit of 0:14:46.520 --> 0:14:49.440 a different dynamic. So yeah, yeah, the answer is yes. 0:14:49.600 --> 0:14:52.920 Over the longer the sample size, the greater the sample size, 0:14:52.960 --> 0:14:54.920 the more we can we could get a signal from 0:14:55.000 --> 0:14:57.640 skill and less important luck is. So yeah, there's no 0:14:57.760 --> 0:15:00.400 question that's the case. So index thing is as big 0:15:00.440 --> 0:15:02.600 today as it's ever been. I think Vanguard is now 0:15:02.640 --> 0:15:05.680 coming up on four trillion dollars, black Rock is they're already. 0:15:06.320 --> 0:15:08.400 Is it safe to say that a lot of the 0:15:08.440 --> 0:15:11.560 public has looked at this process and said, you know, 0:15:12.000 --> 0:15:14.560 I'm kind of done with stock pickers. I'm just gonna 0:15:14.560 --> 0:15:16.680 index and not have to worry about it anymore. Is 0:15:16.720 --> 0:15:19.280 that a driving factor? And I think there's no question 0:15:19.360 --> 0:15:21.560 about that. And you know, for most people that's an 0:15:21.560 --> 0:15:24.280 absolutely correct prescription. Now, you know, that's an argument you 0:15:24.320 --> 0:15:26.760 can you can't take to the extreme. In other words, 0:15:26.760 --> 0:15:29.320 not every single person can index. There has to be 0:15:29.400 --> 0:15:32.240 some act of management in some way, shape or form 0:15:32.560 --> 0:15:35.000 to basically and by the way, they're creating a positive externality, 0:15:35.000 --> 0:15:38.440 which is basically, efficient markets were good prices that the 0:15:38.480 --> 0:15:41.640 indexers can take advantage of. But for most people that's 0:15:41.640 --> 0:15:43.800 really relevant. And you know, I was just looking at 0:15:43.800 --> 0:15:45.320 the numbers the other day. I mean, I know that 0:15:45.400 --> 0:15:47.920 Jack Bogel started the you know, his index fund in 0:15:47.920 --> 0:15:50.440 the seventies, but really for all intensive purposes, it really 0:15:50.480 --> 0:15:53.280 wasn't even going until sort of late eighties, early nineties, right, 0:15:53.280 --> 0:15:56.960 So this is a fairly new phenomenon we're seeing. And 0:15:56.960 --> 0:15:59.240 and the bulk of the assets at a place like 0:15:59.320 --> 0:16:05.160 Vanguard UH really have have come post financial crisis exactly, 0:16:05.200 --> 0:16:08.080 So so you know, it's interesting. And the other thing 0:16:08.080 --> 0:16:11.160 to think about when you think about that dimension is that, 0:16:11.520 --> 0:16:14.440 you know, active investing the zero sum game in the 0:16:14.520 --> 0:16:18.840 sense that UH, for any particular year, the winner's positive 0:16:18.880 --> 0:16:21.200 alpha have to be offset by losers negative alpha, right, 0:16:21.240 --> 0:16:24.040 just mathematically that has to be the case. So it's 0:16:24.080 --> 0:16:26.120 interesting if you if you say, sort of an analogy 0:16:26.200 --> 0:16:27.840 is sort of the poker table, right, So we have 0:16:27.840 --> 0:16:30.320 guys sitting around the poker table playing one night of poker. 0:16:31.040 --> 0:16:33.120 You know, if the people who are the less capable 0:16:33.160 --> 0:16:37.400 are walking out and indexing right, in effect, who's left 0:16:37.480 --> 0:16:40.720 sitting at the table the most skilled the most skilled players. 0:16:41.240 --> 0:16:43.640 So let's talk a little bit about the paradox of skill, 0:16:44.040 --> 0:16:46.000 and this sets right up the paradox of skills. So 0:16:46.040 --> 0:16:47.680 the paradox of skill, which is not my idea but 0:16:47.720 --> 0:16:50.320 I gave that name, says it at when activities have 0:16:50.400 --> 0:16:52.480 both skill and luck, which is most stuff in life. 0:16:52.760 --> 0:16:55.840 As skill increases, luck becomes more important, which doesn't seem 0:16:55.840 --> 0:16:58.360 to make sense, but they counterintuitive way to think about 0:16:58.400 --> 0:17:00.920 this is luck has a skill has two dimensions. One 0:17:01.000 --> 0:17:04.240 is absolute skill, but the second dimension is relative skill. 0:17:04.320 --> 0:17:06.359 And that's really what it's about when you're thinking about 0:17:06.720 --> 0:17:10.200 outperforming others. And what we've also seen is a collapse 0:17:10.560 --> 0:17:13.000 of relative skill. So say the fancier way to say, 0:17:13.000 --> 0:17:15.840 it's a standard deviation of skills gone down. So one 0:17:15.840 --> 0:17:18.719 examples in batting average in baseball or the the average 0:17:18.720 --> 0:17:21.440 batting average doesn't change all that much because it's picture 0:17:21.520 --> 0:17:25.400 hitter interaction, but the standard deviations collapse, and as a consequence, 0:17:25.560 --> 0:17:29.200 there aren't these sort of extreme hitters. No more, No more. 0:17:29.200 --> 0:17:32.520 Ted Williams, I'm Barry Ridults. You're listening to Masters in 0:17:32.560 --> 0:17:36.960 Business on Bloomberg Radio. My special guest today is Michael Mobisan. 0:17:37.400 --> 0:17:40.840 He is the head of Global financial Strategies at Credit Swiss, 0:17:41.240 --> 0:17:45.280 previously chief investment strategist at leg Mason, working with Bill 0:17:45.320 --> 0:17:49.720 Miller Uh Professor of Finance at Columbia Business School, and 0:17:50.040 --> 0:17:53.159 author of numerous books. Let's talk a little bit about 0:17:53.200 --> 0:17:58.280 how the great investors think and again another quote of yours, 0:17:58.320 --> 0:18:02.240 I'm gonna pull what is being wrong? Teach us about 0:18:02.280 --> 0:18:04.959 being right? It's a fascinating question. And by the way, 0:18:05.000 --> 0:18:07.639 there's a great book by Katherine Schulz basically Being Wrong. 0:18:07.680 --> 0:18:11.120 Of that title. Here's the interesting thing, Barry. We wake 0:18:11.240 --> 0:18:14.840 up every day and think that what we believe is right. 0:18:15.200 --> 0:18:20.359 What yours in your head is what you think is right. 0:18:20.400 --> 0:18:23.720 So then you wander into the world and you're confronted 0:18:23.760 --> 0:18:26.200 with the reality that all the stuff you believe may 0:18:26.200 --> 0:18:28.840 not be right. And the real big question is how 0:18:28.880 --> 0:18:30.560 do you deal with that? Right? And so there are 0:18:30.560 --> 0:18:32.879 some mult you and I disagree on something. There might 0:18:32.880 --> 0:18:35.440 be some ways I say, either Barry doesn't understand the facts, 0:18:35.440 --> 0:18:37.240 and if I just tell him the facts, he's going 0:18:37.280 --> 0:18:38.760 to come around to my point of view. It could 0:18:38.800 --> 0:18:42.240 be Berry's not quite smart enough to understand my nuanced 0:18:42.240 --> 0:18:44.639 point of view, or could be Berry's turned his back. 0:18:45.000 --> 0:18:47.199 You know, he doesn't get it anymore, and you know 0:18:47.240 --> 0:18:49.440 he's being, in a sense almost evil about this thing. 0:18:49.520 --> 0:18:53.159 So I think this idea of of recognizing, especially the 0:18:53.160 --> 0:18:57.280 world of investing right where where so important, so important 0:18:57.280 --> 0:18:59.119 because what happens is I mean, what is what is 0:18:59.240 --> 0:19:02.399 rational being? What does it mean to be rational? And 0:19:02.440 --> 0:19:05.679 the answer is that your beliefs map accurately to the world. 0:19:06.040 --> 0:19:09.000 That's a real challenge if the world's constantly changing, because 0:19:09.000 --> 0:19:12.119 that requires you to change your own views. And most 0:19:12.119 --> 0:19:15.320 of us, truth be told, are fairly cognitively lazy, would 0:19:15.400 --> 0:19:17.760 rather just sort of keep doing what we're doing. So 0:19:17.880 --> 0:19:20.199 that to me, when we say what are the characteristics, 0:19:20.240 --> 0:19:22.640 that's a big one. And being wrong teach you about 0:19:22.640 --> 0:19:25.120 being right is to say I need, yeah, I need. 0:19:25.240 --> 0:19:26.840 My map is off and I need to adjust it. 0:19:27.040 --> 0:19:28.760 The other thing I'll say, you know, you mentioned Charlie 0:19:28.840 --> 0:19:30.960 Munger a few moments ago. You know, Charlie Munger has 0:19:30.960 --> 0:19:32.880 got this great coro says, we got we did well 0:19:32.960 --> 0:19:35.680 Berkshire Health Hathway less by being brilliant and more by 0:19:35.680 --> 0:19:38.000 not screwing up a lot. And there's a little of 0:19:38.040 --> 0:19:40.639 that effect as well. So just by not making as 0:19:40.680 --> 0:19:46.120 many mistakes, yeah, you you, you will do better over time. 0:19:46.160 --> 0:19:48.160 So I think that's another aspect of the not being 0:19:48.160 --> 0:19:51.679 wrong dimension. You know, I'm fascinated now that we're in 0:19:51.680 --> 0:19:54.679 the midst of the political silly season, the idea of 0:19:54.720 --> 0:19:58.720 cognitive dissonance, that when a person has a wrong map 0:19:59.280 --> 0:20:04.119 and you can front them with in controvertable facts, Hey, 0:20:04.960 --> 0:20:08.560 crime is at decade lows, the number of police killed 0:20:08.680 --> 0:20:12.840 are at record lows relative to any time over the past, 0:20:13.440 --> 0:20:19.199 you know, thirty forty years. How the brain manages to 0:20:19.400 --> 0:20:23.960 either ignore the data or somehow deal with it because 0:20:24.000 --> 0:20:28.239