This video comes highly recommended by me. Steve Forbes interviews Michael Mauboussin, Adjunct Professor at Columbia Business School and Chief Investment Strategist at Legg Mason and the video is filled with insights on behavioural biases, efficient markets, stock-picking, value investment - watch it and compare that with how you think about investments. Go here for the transcript.
One of my favourite bits is:
"So you go to the horse race and there are odds on the tote board. That is the expectation of the performance of the horse. And then there’s fundamentals: How fast that horse is going to run. Now, if you studied tens of thousands of horse races, it turns out the markets are pretty efficient. The ordinal finishes of the horses, first, second, third, as predicted by the odds, is pretty much what happens. But from time to time, we know, there are mis-pricings. There are odds on the tote board that just don’t well describe how that horse is likely to run. And that’s what the sharp handicappers are after.
Bring that over to the world of investing, and that’s the same thing. We don’t have odds on the tote board, but we have something called the stock price. So we reverse engineer the expectations built into that price. We say, “What has to happen for that to make sense?"
And then we look at how the fundamentals are likely to unfold. It’s a probabilistic exercise. That would be the first piece. The second piece, analytically, is bet size, which is once you have an edge, how much do you bet in your portfolio? That’s a second key component which is often overlooked."
No comments:
Post a Comment