Michael Mauboussin: The Single Biggest Mistake Investors Make In Decision-Making | 20VC #945

1. 0:00 – 1:28

   How Michael Spends His Time Today

   1. HSHarry Stebbings0:00

      Michael, this is such a joy to do. Obviously, I heard so many good things from our mutual friend, Bill Gurley. I've read every book that you've written. So, thank you so much for joining me today.

   2. MMMichael Mauboussin0:09

      Thank you, Harry, I'm really pleased to be with you today. And I'm a big fan of- a big fan of your podcast.

   3. HSHarry Stebbings0:13

      That is very, very kind of you. Uh, I can't believe I actually get to do it for a job, to be honest. But I want to start with you. Um, you're- you're a celebrity in venture circles, um, and I want to start with a question from Bill Gurley which is, like, "What do you do, Michael?"

   4. MMMichael Mauboussin0:26

      (laughs)

   5. HSHarry Stebbings0:26

      "And how do you spend your time today?"

   6. MMMichael Mauboussin0:29

      Yeah, exactly. Well, my title is Head of Consilient Research for Counterpoint Global, which is part of Morgan Stanley Investment Management. We're a long-only, um, investment management firm. Uh, also have, uh, s- ventures, investment, uh, fund as well. But my job is really three parts. One is to work with our team on investment process, so things like, how do we think about markets, how do we think about valuation, competitive strategy, decision-making. The second part of the job is really doing research and, uh, that is thinking about topics and, and writing about them. And then finally is external things, things like conferences or, or podcasts or things like that. And the way I like to describe what I do is input and output. So try to find something that's interesting, spend some time to understand it, and then communicate it both internally and externally. So it's a, it's, for me, is a very fun and gratifying job and, uh, allows me to, uh, to pursue a lot of interesting things.

   7. HSHarry Stebbings1:19

      You said about input and output there, and that makes me think about kind of decision-making and process. But you've said some brilliant things before, especially on kind of luck and randomness. And you said

2. 1:28 – 7:57

   Luck vs. Randomness

   1. HSHarry Stebbings1:28

      randomness and luck are related, but there's a useful distinction between the two. What's the distinction between luck and randomness, Michael?

   2. MMMichael Mauboussin1:37

      Yeah. It's a great question. I mean, let's start by defining luck. And, and by the way, this gets into philosophy very fast, but just to be, try to be practical, I'm gonna say luck has three conditions. It happens to an individual organization, so to you or your company or your favorite sports team. Second is it can be good or bad. Don't mean to subme- suggest that it's symmetrical, but there's a positive side and potentially then a negative side. And then third, and this is important, it's reasonable to expect a different outcome could have occurred. Right? So if we replay the tape of time, reasonable to expect a different outcome. So the way we think about randomness versus luck is randomness would be at the system level and luck would be more at the individual level. So for instance, every year in my class, I do a little exercise to demonstrate this point. I flip a coin and I ask the students to guess whether it's gonna be a head or a tail, right? We do a s- a bunch of them in a row. So what I know is, given the size of the class, that someone's very likely to get four or five in a row correct. The coin tosses themselves, assuming... I actually (laughs) I actually do it with a simulator 'cause I'm so bad at it. But, uh, the coin toss themselves, I'm gonna deem to be random. But if someone, if you're the one that calls four or five in a row correctly, I would call that to be l- I would call that luck. So one would be system level, one would be more individual level. And so when you think about investing, there may be a lot of randomness in the system, and some people are gonna be in the position to be lucky and hence they'll, r- their track record, for example, may look good as just beneficiaries of a, of, of a random system.

   3. HSHarry Stebbings2:56

      I, it, I, I love that as a distinction. You said before as kind of a follow-up to that, well, my natural kind of question was, why does putting yourself in a position to enjoy good luck, what everyone obviously wants, why does that put you in a position to lose?

   4. MMMichael Mauboussin3:09

      Yeah, I mean, the first thing is, I'll just say that there, there are, like, a f- a bunch of aphorisms about luck. You know, "Luck is where preparation meets opportunity," or, "The harder I work, the luckier I get." And I don't really find any of those very appealing, candidly, if you, if you-

   5. HSHarry Stebbings3:21

      (laughs) .

   6. MMMichael Mauboussin3:21

      ... accept my definition of luck, right? Um, because in another way of thinking about it is that, you know, uh, skill is what's in your control and luck is what's out of your control. So by definition, out of your control. Now that said, Harry, I think that, you know, what you're picking up is on something like this. You say, "Oh, I, you know, my friend won the lottery yesterday," right? And, and y- we'd all agree, I think, that that was lucky. Now, you would not be in a position to win the lottery unless you buy a lottery ticket, right? (laughs) So in a sense, you have to be willing to lose in order to potentially win. The fundamental question it all distills down to is, is it positive expected value or negative expected value, right? So and, and, and investing, by and large, should be obviously positive expected value. Playing the lottery, by definition, or gambling, is a negative expected value. As a consequence, people should be, you know, they should do it for fun if they would like and for other, there may be other psychic benefits of it. But just in pure monetary be- uh, uh, uh, pros and cons, it's gonna be a negative game.

   7. HSHarry Stebbings4:18

      Can I ask, where do you find people most misunderstand this theory and this understanding? Where do your students misunderstand it? Where do you hear people just not get it?

   8. MMMichael Mauboussin4:28

      Yeah. I mean, I think that, uh, because it's about attribution, right? (laughs) In other words, if things go well for me, uh, I want to think that I'm skillful, that I, it's like volition, that I'm the one that's responsible for it. And if things go badly, I want to point the finger at somebody else. So I think a lot of it is just sort of taking responsibility for all these things. But even taking one step back here, I would just say that it's not always clear, you know, various activities have various combinations of skill and luck, uh, in, in determining the outcome. So you think about things like chess matches or running races, that's almost pure skill and luck plays a very, very, a fleeting role in those kinds of things. By contrast, we were talking about, you know, lotteries, about roulette wheels and certain... Those things are all basically luck and very little skill. And most things are at some between those two extremes, and I think our minds are not particularly good at sorting out where that activity is on that luck-skill continuum. And as a consequence, it's misattribution basically.

   9. HSHarry Stebbings5:22

      The thing I find interesting with venture is, you can be lucky and attribute that skill to yourself and, when it's actually luck. But actually, it can make you a better investor, I've found. Because you lose your downside scenario planning. You see the best in things. And you're not fearful of losing your money where others would be. I guess the question is, like, does it matter, I guess? If you can attribute it to yourself and you become a better investor, I guess, does it matter?

   10. MMMichael Mauboussin5:50

       I don't know if it matters, but I, you know, venture's particularly interesting. You know, one of the measures of skill, for instance, is this concept of persistence, which is, you know, if you won yesterday, will you win today, and will you win tomorrow, and so forth. And so, persistent activities tend to be indicative of skill. Interestingly, if you look across asset classes, the, the, the asset class that continues to have high persistence is actually venture capital. So, the question is, why is that the case? And so it's a very interesting question, and, and I think there are some provocative potential answers to that. Well, one of them is this idea of preferential attachment, right, that once, it could, you could have gotten yourself, uh, you could have made a few successful investments by dint of luck, but once those, uh, successes have occurred, people tend to preferentially attach to you as a venture capitalist. So, you think of certain organizations, certain, you know, great venture capital firms, that if you are a hot up-and-coming company, and there's a pre- presumption that you, people can figure that out, you're gonna preferentially attach to the big names on the venture side, and then that becomes this feedback that allows the, the sort of top firms to sort of differentiate themselves from others. And what we know, uh, is that there's huge dispersion in returns in venture capital. So, if you own the top decile or twen- uh, top quintile type of firms, you do spectacularly well over time. But if you own the e- median firm or bottom-quartile firms, uh, the results are actually quite dismal. So, that's a really, uh, venture is, uh, particularly interesting because the question is sort of, what are the mechanisms that contribute to that persistence? By the way, that persistence used to ha- happen in buyouts, but that effect has mostly melted away in the last 20 years, and it's very difficult to find persistence in public markets, uh, at all. So, it's a very interesting, that's a very interesting topic, broadly speaking. And so, but, you know, the key is to be a little bit circumspect, which is, you know, if my, if I'm successful as a venture capitalist, for example, how much is, is the name on the door and how much is, is much as me as an individual sitting in the seat wh-, who allows, who, who can take and take the phone calls and take the meetings and, and, and hence allocate the capital?

   11. HSHarry Stebbings7:48

       Yeah, well, 100%. Um, I think it's the, the challenge that all spinout GPs face when they try and raise their own funds. Um, I, uh, why don't we think about that though then? Is investing

3. 7:57 – 13:09

   How to Build a Process for Investing

   1. HSHarry Stebbings7:57

      in or building a company on a novel premise, is that a luck-based endeavor?

   2. MMMichael Mauboussin8:03

      I don't, I mean, I don't think so. Of course, I, I, I think that you wa- what you strive to do is to develop a process that you think will allow you to have the most, uh, be- best chance of success over time. And one of the things I would just say, Harry, about building a process is, the first thing to think about, and, and think about deeply, is actually what you're trying to do. Like, how do you think you're gonna achieve some sort of an edge versus other people doing it? And in effect, the process you develop is, is so- should be something that contributes to that source of edge. You know, so for example, in public markets, you'd think about the two extremes would be, you know, Jim Simons at Renaissance Technology, right? Tons of technology, very smart people trading very frequently. And on the other side of that continuum would be Warren Buffett, who purportedly sits in his office all day and reads and then makes these very few, but very consequential investment decisions. Both of those, uh, folks have had suc- very successful over time, but their approaches and their processes are very different. So, the key is that there is no one-size-fits-all for process, I think, but rather that you want to make your process congruent with your per- perceived source of edge. And so that, to me, is sort of the key thing to, to bear in mind. And it's, it's, it's often one thing, people say, "Here's what I do all day." Usually when you're marketing your fund or something, there's a little bit of aspirational component to what you say you do.

   3. HSHarry Stebbings9:22

      (laughs)

   4. MMMichael Mauboussin9:22

      But the key is to be as congruent, to, to do actually, is to, to hew as closely to, as possible to that process in order to achieve the, the results you, you pursue.

   5. HSHarry Stebbings9:30

      The brilliant thing about me doing this show is I can just ask for your advice and feedback. So, if we think about process being congruent with edge, my edge, I believe, is that we are the true intersection of a media company and a venture fund. We leverage media to be the best investors. How does that impact my process? Through the media, I meet the world's most brilliant founders, and with each deal, I create an individual investment committee of three leading founders in that specific space, and I bring their collective minds to make the best decisions together. Would you say that is where my edge is congruent with my process?

   6. MMMichael Mauboussin10:07

      Absolutely. Fabulous. And, you know, other things you like to see in a p- in a process that's good would be things that you're, that it's economically sound. Now, the fact that you're tap- tapping these founders, they, they have some experience, that would be important.

   7. HSHarry Stebbings10:18

      Mm-hmm.

   8. MMMichael Mauboussin10:19

      Um, the other thing to say is that your process should be allowed to evolve. And, and in some ways, I would say that there are mutable and immutable components. Immutable things where, you know, certain standards you wanna make, uh, maintain and the sort of objectives you wanna pursue. But mutable is, hey, the world changes, and we need to make sure that we're updating our frameworks and mental models to accommodate that. Um, you also wanna build in, uh, techniques to manage or mitigate bias. I mean, you mentioned that just a moment ago. And so it's interesting, you said a, a group of three. Three is a really good number for decision-making and, and, and because it's a, it's an odd number, right? And so you can have-

   9. HSHarry Stebbings10:54

      Do you know, do you know, do you know why I did it though? Because I used to do it with two, and people don't feel free to discuss with two because they feel like they're in an argument.

   10. MMMichael Mauboussin11:01

       That's right.

   11. HSHarry Stebbings11:02

       But three, it's a discussion. Two, it's a really heated debate.

   12. MMMichael Mauboussin11:05

       Right, right. And the other thing about three is, if it comes down to it, you can actually have a two-to-one, you, people can vote and it can be two to one, and you can proceed without... W- you know, you can have the dissenting voice be in the room in a way that's not, uh, ultimately destructive. And the last thing here is you want that to be repeatable. So, in other words, you say, "Hey, I've got this formula. Here's what I'm doing. Here's why I think it's delivering, you know, de- delivering on this edge, uh, I'm pursuing." But you want to be able to repeat it over time, right? So, the more you do it, the more... We want this to be something that's just not a one-off, but it's, it's a process that works over time. So, yeah, that, I mean, certainly that all makes sense to me.

   13. HSHarry Stebbings11:40

       Can I ask you, what makes bad process? Or where do you see most people make mistakes in that process?

   14. MMMichael Mauboussin11:46

       Yeah. I mean, it's usually, uh, two things. One is a deviation from what you say you're trying to do, right? So, you just laid out kind of how you're approaching it, this combination of media and venture investing and so forth. You know, the question is, are you starting to do things that deviate from those things? Or are you bringing these three founders, your, your little investment committee-... and they, and they really have e-expertise and, and different points of view, and you override them for whatever reason, right? So, you just depart from process in a way that's, um, non-systematic. And by the way, it's not that hard to do because sometimes you may have a process and it's, you have a couple things that don't work out, right, which is gonna be naturally happening. So, you start to question what you're doing, so you deviate. That's, um, that's one problem. The other one is just letting biases creep into what you're doing, right? So, biases would be things like... And the- and these, you may be emboldened by success, by the way. But two big sources of bias, I think, are, one is overconfidence, and when you look at overconfidence, usually the, the, the, the, the sub-component of overconfidence and the problem is over-precision, in which you start to think you know what the world is gonna be rather than, better than you do. And the other one is confirmation bias, which is, sort of, you know, when you have a view of something and, uh, you have a thesis, you start to seek information that confirms your point of view and dismiss or disavow or discount information that, that doesn't h- it's not what you believe. And that can be problematic, uh, in terms of your updating your views. So, anyway, uh, those would be two things I would point out that would be, to be, to be careful about.

4. 13:09 – 15:29

   Thesis-driven Investing

   1. MMMichael Mauboussin13:09

   2. HSHarry Stebbings13:09

      So, uh, this is why I don't like thesis-driven investing, if I'm honest, Michael. It's because you develop a thesis in your mind, you meet a company that aligns to that thesis and you go, "Yes, that is the one." And then, you, you're going, "Well, there's probably a 50% chance that your thesis was wrong," but confirmation bias has made you commit to that deal. How do you think thesis-driven investors can not fall victim to confirmation bias in that situation I just laid out?

   3. MMMichael Mauboussin13:34

      Yeah. No. Right. Exactly. I think this is a really big issue. And, um, the biggest thing, I th- the way I would think about this is to say if you do have a thesis... And, and I... By the way, I'm not averse to that, but if you have a thesis, you should be thinking about so-called signposts, which is to say, "If this thesis is correct, here are the things that we should see happen as we travel down this road."

   4. HSHarry Stebbings13:55

      Yep.

   5. MMMichael Mauboussin13:56

      Right? And these signposts are things you should communicate in advance, not as we go, but in advance, and typically write them down and you should write them down specifics with probabilities, right? And so if this is, th- this is what we should happen. Every time you don't pass a signpost or the signpost is something very different than what you anticipated, that should be a stop point, and the stop point should say, "Okay, is there a reason for this, reasons it could be, or should we kill, right? Should we quit what we're doing?" And so you, in a sense, you've laid it out in advance. Um, you've laid out the potential problems, you've laid out the potential opportunity, and you've... You, you know, so you're almost, you're pre-committed to changing your course of thought if, if, if your thesis isn't unfolding as anticipated, right? So, the key, uh, Harry, is to do the work upfront, essentially, um, and, and, uh, as a consequence... And think through the potential, uh, alternatives. And then that almost compels you. And then, by the way, you might even, I might even call you up, Harry, and say, "You, I want you to be my decision buddy." You know, "You, you, we're friends, you like me and you have my best interest at heart, but you're gonna be honest," right? And so I'm gonna say, "Oh, Harry, here's what happened. We thought this and these two, three things happened," and you'd be like, "Okay, that's it. You know, based on what you said, that is not happening the way you thought. You should move on, right, somehow." So, there, there's, there, you can, you can also bring in people to help you, almost coach you through that decision to, to be honest and to change tack if appropriate.

   6. HSHarry Stebbings15:18

      I think there's two things which prevent the purity of decision-making and process and freedom of speech in investment committees and decision-making. Uh, one is politics and two is safety, actually.

5. 15:29 – 21:23

   How to Encourage Your Team to Speak their Mind

   1. HSHarry Stebbings15:29

      You know, we have thousands of GPs and VCs that listen. How can GPs and investors create safety among their teams and among their investment committees, where people can feel free to say anything without being judged or without being fearful that they're speaking to Bill Gurley inside?

   2. MMMichael Mauboussin15:46

      I love this question, Harry, and I just say when we work in teams, we always talk about three components. One is the size of the team and the comp- you know, size of the team. And you've heard, you've got that. But, you know, usually smaller is better, right? And the, the right number is between three and six, something like that. The second is a composition, which is you want cognitive diversity, so people bringing different points of view. But the third piece is how you manage the meeting, how you manage the team. And I would just say that usually there is cognitive diversity in the room. Almost always where the failures occur is in how it's managed. So, it's very much good hygiene demands that leaders of teams, uh, figure out ways to surface alternative points of view. And there are techniques to do that. Things like pre-mortems as an example. You know, the thing is, if I'm the leader in the organization, to go and ask the opinion of the most junior person in the room first and then go, go up in seniority from there. I mean, there are techniques to do this. But this is the problem, is usually people who rise to be the leaders, and you've mentioned politics, is exactly right. Whenever I talk about this and say like, oh... Uh, well, well, the phrase is actually "people defer to the HiPPO." Have you ever, have you ever known this term?

   3. HSHarry Stebbings16:50

      Yeah, I did. (laughs)

   4. MMMichael Mauboussin16:50

      HiPPO. People defer to the HiPPO. HiPPO stands for High-Income Person's Opinion. (laughs) I like it.

   5. HSHarry Stebbings16:56

      (laughs)

   6. MMMichael Mauboussin16:58

      So, so if you are, if you've risen to be the HiPPO yourself, you have to be the one that manages this process to make sure that you're getting closer to hearing what's going on on, on the ground. And by the way, often it's the case as you move up in the organization, you're further away from the actual on-the-ground what's going on. And as a consequence, you have to be doubly mindful to be paying attention to that. So, yeah, I think that, that, that good decision-making hygiene demands that the leader of the team puts into place these mechanisms to make sure that alternative points of view are surfaced, and that's where you get into this idea of psychological safety, as you point out. That not only am I fine with you saying something that's different than what I believe, I'm encouraging you to do that. In fact, I'm almost demanding that you do that to make sure that we have a robust and, and fulfilled conversation.

   7. HSHarry Stebbings17:41

      So, the way I do it is I send actually a Word doc, not a Google Doc, because that's obviously collaborative. I send out a Word doc the night before. So, it's all in isolation, no one sees what other people put, and then they have this kind of free space to really illustrate how they feel, and then I bring them all together. And then in the meeting, I can draw on that and say, "Ah, Michael, you actually said you really didn't like this for that reason. Talk to me about that." And you wouldn't have probably said that if it was in a collaborative doc where people are chiming in. Are there any other ways that you've seen it really work and bring out real-

   8. MMMichael Mauboussin18:11

      No, that's, uh, that's fabulous, Harry. That's fabulous. And the other one, I mean, the other technique is known as a pre-mortem, which you're probably familiar with, which is we pretend we made the investment. It's now a year from now and this inve- or two years from now and this investment's turned very sour, it's very bad, we're un- un- un- displeased with it. And then each of us writes down today why, basically, the, the story from the Financial Times and Wall Street Journal that's published two years from now why this didn't turn out well, right? So, again, it's the same, it's the same mechanism that you just described, which is you're encouraging people to think on their own...... why this, you know, sort of what the downside is in these types of scenarios. And, and that, again, surfaces potential problems. We have to think about upside as well, but it surfaces potential problems, which are then we can identify and see, uh, are, A, are these risks worth, worth taking, and B, if these, some of these eventualities occur, how do we, how do we take care of them or, or deal with them in a way that allows the investment to continue to work out well?

   9. HSHarry Stebbings19:03

      How do you think about when's the right time change process? Or just improve it in some ways. Like I said, when I had two people on my ICs, it didn't work honestly, Michael. And then when I had three, it was like product market fit of investment decision-making. (laughs)

   10. MMMichael Mauboussin19:17

       Yep.

   11. HSHarry Stebbings19:18

       But I could have kept going with two and it just meandering in the way that it was. How do you think about when to change a core investment process?

   12. MMMichael Mauboussin19:26

       Yeah. I mean, to me, I, I think it's, you, you know, all this, you can do a lot of pre-work and get sort of best practices. And you know, three is better than two. That's a best practice. And, and by the way, five is, is not. Five is better than four, for instance. You know, these odd numbers tend to be good things in terms of ... And, and there's good data, (coughs) pardon me, there's good data to back all that up. But to me, the, the issue, uh, so, so that, get that hygiene down, that process down, uh, in terms of the best practices. The other part that's very difficult is literally how do we update our views of the world as the world changes? That becomes the big challenge, right? And that, you know, the fancy term is to be an appropriate Bayesian, which is I have a prior view of the world. As new information tumbles in, I revise my view in the proper direction and the proper magnitude. That is the very difficult thing to me. So when do you, when does, when does the world have to change? When does your process have changed to reflect that? (clears throat) I'll give you a couple exam- one example certainly, and, uh, w- we do a lot of work on this in public markets but are rel- very relevant for private markets as well, which is, we've had, uh, I- in the last few decades, a huge rise in intangible investment, right? So companies used to invest in factories and machines and inventory, old-fashioned stuff, and the accounting for that was a certain way. Now, companies are investing mostly in intangible, uh, assets, and the accounting is very different, right? So if I'm using a simple heuristic in my process of profits are good, losses are bad, I might be very much missing the boat. So I need to update my views. I need to update my process to accommodate the nature of the re- uh, of the new investment. Now, it doesn't mean that just because you're losing money it's good, right? It, you still have to get to the core issues. But that's an example of a process update that I think would get you closer, a step closer to reality and, and, and, and economic truth.

   13. HSHarry Stebbings21:11

       My question to you is, you know, you've said before about everything being a DCF. And as a venture investor, I went, "Hmm. (laughs) That's an interesting thought," and we forget that, you know, our job is tied to DCFs ultimately. So can you

6. 21:23 – 28:08

   EXPLAINED: Everything is a Discounted Cash Flow

   1. HSHarry Stebbings21:23

      explain this idea of everything being a DCF, specifically for a venture audience?

   2. MMMichael Mauboussin21:29

      Yeah. So Harry, I got to say that the, the impetus to write that report was, a venture capitalist actually sent me a note about venture, value venture businesses, and I was like, "I don't really like it." So, uh, it got me to, it encouraged me to write that. Um, listen, I think that the way I would think about this as a venture capitalist is not that I'm gonna build some elaborate DCF model. Of course that's un- very unrealistic given the, the, the wide range of potential outcomes. I think that the, uh, for that, for venture in particular, I would step down to, you know, what I call the basic, well, uh, many people call the basic unit of analysis, which is fundamentally how will this company make money, and understand that. Now, obviously, sometimes, it's, we're gonna build up to how the economic model is going to work. But it's really trying to get some clarity around ultimately what the economic model is going to be. So that economic model then becomes the foundation upon which the future cash flows are built. And when you think about the value of any financial asset is the present value of the cash flows, and as a venture investor, eventually you are going to have an exit. The number one form of exit, of course, is to sell to a strategic buyer. And when you do that, the problem becomes their problem. They have to figure out how to extract the cash flows from the business over time. Or if you go public, of course, then, uh, you, you continue to manage the business and the market, uh, places its best judgment on the present value of the future cash flow. So, so to me, um, it, it, it all co- it comes down to the basic core, is are we investing in such a way that will generate app- appropriate returns? So the appropriate returns then will generate cash flows, and that's, at the end of the day, sort of the, the thing that guides all of our thinking. (clears throat) So to me, that's how I think about it. Now, the other thing I would just say about venture and, and, and some public companies as well, is that there is like a substantial component of options, optionalities, or like real options you could think about, think about it that way. And that, that is something that, um, one can take into consideration. And real options tend to be relevant when there's a lot of uncertainty, which is almost always true for young companies. Second, when we have an astute management team that knows how to cultivate and ultimately exercise options appropriately, when there's access to capital, which is also really important, and typically a market leader, because the market leader tends to have more, um, alternatives than the second or third, uh, tier players. So, so that's another component. But even an option eventually becomes, uh, free cash flow. So it all boils down to the same si- same thing at the end of the day. So that's the, my long-winded answer to this question, is focus on the underlying economics. That's all driven by cash.

   3. HSHarry Stebbings23:52

      I, I understand that. But let's go to pre-seed and seed.

   4. MMMichael Mauboussin23:56

      (laughs)

   5. HSHarry Stebbings23:56

      You know, if we lo- you know, I did BeReal, which is like a consumer social, um, very, very fast-growing company, one of the fastest in the world. Um, you look at any of the early days of a lot of some of the biggest companies, they had no idea how they were gonna make money. They also had no idea the scale with which they'd make money, the strategy changed. I mean, everything is so uncertain. So I guess my point is, is there a point in actually doing these models or even thinking in this way when it could actually lead you to say no to something that could be amazing?

   6. MMMichael Mauboussin24:26

      Yeah. I mean, and the thing is that, um...Look, e- even these companies where there's not, uh, you're not generating revenues yet or you don't know how you're gonna monetize, uh, there is a build it and they will come philosophy, right? Which is, uh, eventually if we have a- a n- you know, at BeReal, if we have enough users, there's gonna be some way that we can monetize this in some way, shape, or form. If you, if you believe there is no monetization ever, uh, then you're probably not... It might be a fun exercise but it's, uh, a labor (laughs) like, you're gonna be using up a lot of capital without getting a return on the capital. So, it depends what you're trying to do. (clears throat) So, you know, if you think about early days of Google, before they came up with mon- monetization, they obviously came up with techniques to- to get a lot of people to use their search engine. Um, but that can't go on forever unless you have some- some method to monetize, assuming that you're in business to make money and investments. So, which I-

   7. HSHarry Stebbings25:17

      Do you-

   8. MMMichael Mauboussin25:17

      ... which I presume most venture capitalists are, right?

   9. HSHarry Stebbings25:19

      Do you look at VCs today... I'm just fascinated. Do you look at VCs and see like 30 million price for like, you know, two people and a dog in a garage with nothing and go, "What are these people doing?" (laughs)

   10. MMMichael Mauboussin25:31

       Well, I mean, yes and no. I mean, the one thing that I would say that, you know, there's a, there's a- I found to be a fascinating, not surprising but fascinating academic paper published a couple of years ago, where they looked at the distribution of returns for 30,000 venture capital investments. So, these are individual investments. And then they looked at 15,000 buyout investments to look at the pa- the distribution of returns. And, you know, in venture, you know, I'll just say what everybody already knows, the majority of investments lose money, right? But a handful of investments make so much money that they more than common- you know, make up for everything else, right? So, the overall returns for venture over time have been pretty good, mostly because it's a few companies pulling all the- all the freight for the whole thing. Now, that said, when you say, "Oh, $30 million for two people in a garage," the key is, even those investments that lost money were deemed to be positive expected value investments, right? They had option value. They had potential. We know in advance... So, it's not- it's not how often you make money that ma- matters, it's how much money you make when you're right. So, on one level it seems, you know, if it's- if it- if the ideas are not good or the people are not good, that would be problematic. But on the other hand, if it's a- a positive expected value, going into this you should understand the distributions of the payoffs. And going into it, you should understand that the majority- even if you're really good at this, the majority of things m- may not work out from a financial point of view. But again, acknowledging that it's gonna be a handful of things that are gonna be very, very profound. Um, it's interesting how... This is gonna sound weird but one of the- the analogues I found fascinating is with horse race betting. You know, so it turns out in the 1970s, almost all the bets placed were win, place, or show, right? So first, second, or third place. And these are very plain vanilla bets. Today, the most sophisticated bettors are betting on these (clears throat) exactas and these parlays, things that are much more sophisticated. They have much lower frequency of payoff but much higher payoffs when they do pay off. And why I think that's interesting is that mindset is completely different. If you're betting win, place, or show, you know you're gonna win at a higher rate, although you're gonna win much less. If you're betting on exactas and parlays, you're gonna win at a much lower rate but the payoffs are much higher. Philosophically, psychologically a very different type of- type of thing. So, anyway, I- I think it's- that's a very important observation, is to know the type of system you're dealing with to understand the distribution of payoffs and to acknowledge that sometimes it's gonna seem insane to pay a lot, $30 million for two people in a garage, when that still may have positive expected value if that becomes one of the- the few things that really

7. 28:08 – 30:09

   The Increased Supply of Capital in Venture

   1. MMMichael Mauboussin28:08

      drive the value.

   2. HSHarry Stebbings28:09

      What worries me with venture is, with the increase in supply of capital, you obviously see increased competition and increased pricing which obviously then reduces the size of your outcomes. If you come in at 50 not 10, that's a very significant return difference. And what worries me is we're gonna see this denigration of venture returns, much more to PE-like returns. How do you think about that and do you think that's fair for me to worry about that?

   3. MMMichael Mauboussin28:34

      Absolutely fair. Anytime you see capital flowing into something, you should worry about returns. That's just, that's like a basic rule. And, you know, if you look at long-term public market equivalent, so- so this is how academics would measure this, public market equivalent. For venture capital, it's actually been pretty good over long periods of time but it's extremely episodic. So, almost all the returns are earned in very short windows. One was around the dot-com, one was actually what we just went through in 2020 and 2021, and now we're back... we're probably back down to sort of PMEs closer to one, right? So, for venture it's very episodic. So, buyouts, by the way, have consistently been a little bit better than, um, private equity, been a little bit better than venture. Um, they're- they're much less episodic or dramatic and they tend to chug along a little bit over one PME. So, um, yeah, I mean, I think that you always should worry about that. And the other interesting thing is just taking a close examination at how companies are exiting, right? And so what's happened is, you know, a generation or two ago, a lot of companies went public. For a lot of reasons now, companies are not going public at the same rate. Uh, these are interesting questions as to how to think about exits as well. So, the whole complex should be examined pretty carefully, and, um... And- and by the way, what you said about private, uh, about venture is also true for buyouts, right? Same thing, a lot of capital going into that area, uh, competitive to buy businesses and so forth. Now, for buyouts it helps when the public markets go down. For- for venture, it doesn't help when the public markets (laughs) go down, right? So, there's a contrast, because buyouts can then do stuff, uh, to buy things cheaper today than they

8. 30:09 – 31:48

   When is the right time to exit a position?

   1. MMMichael Mauboussin30:09

      could before.

   2. HSHarry Stebbings30:09

      Speaking of the episodic nature of returns there, uh, Doug Leone told me on- from Sequoia, "Harry, just never sell your winners." And, uh, you know, I- I- I took that very much to heart, um, and I didn't sell some winners at the time. Um, that was a mistake. How do you think about position exiting and when's the right time to take the chips off the table?

   3. MMMichael Mauboussin30:33

      Yeah, I don't know if there's a good answer for that. I mean, part of it is, at some point, if a company gets mature enough, you should be able to start to assess value on some, in some way, shape, or form. You mentioned early on having these models might be silly, and I don't disagree with that. But at some point, if there's, uh, some point of maturation, and, and certainly if the company's gone public or even it's, it's gotten some degree of maturity, you can start to think about, uh, you know, values or ranges of values that you think are appropriate. And, and the answer is yeah, when the company meets or exceeds that value you think is reasonable, that then you should scale, scale out of it. Now, I'm sympathetic to the argument is, you know, this is work by Hank Bessembinder demonstrates that in public markets over long periods of time, most companies' public markets earn returns less than treasury bill rates. And it's like a handful, less than 5% of companies basically drive all the value for the stock market. So that's the argument for latching onto the winners and holding onto them forever. The premise is that you can find them and you know you own them and you know which ones are gonna be the winners. Um, so that would be the argument in favor of doing that. So that's, that's finding the whatever, you know, Apples when they're turning or Amazons or Microsofts when they're, when they're starting to emerge. Um, easy, easier said than done, but that's the logic for holding onto winners.

9. 31:48 – 34:05

   Concentrated vs. Diversified Portfolios

   1. MMMichael Mauboussin31:48

   2. HSHarry Stebbings31:48

      You mentioned the very skewed nature of distributions to very, very few companies.

   3. MMMichael Mauboussin31:53

      Mm-hmm.

   4. HSHarry Stebbings31:53

      It leads me to think, well, damn, (laughs) maybe we're not very good pickers. Maybe we should just have 500 companies. And given the concentration of returns in such small companies, as long as you're in them, it doesn't matter because they're so much bigger than you could ever anticipate. How do you think about portfolio sizing in particular and doing the 100 companies in a portfolio and it doesn't matter as long as you're in that one, versus the Bill Gurley and the Benchmark, very concentrated 15 to 20 picking and the art of picking?

   5. MMMichael Mauboussin32:25

      Yeah. It's a great question, and obviously a number of firms in recent years have pursued the prior strategy, uh, just like shotgun, right? And, um, by the way, in public markets, that's indexing. So you just own everything and, and you don't have to worry too much about the details and assuming that overall it's gonna work out in your favor. Uh, you know, and you know, firms like Benchmark and you look at how small the funds are that they're raising, you know, they're still raising funds with millions instead of billions. So an M instead of a B in front of it, you know, that's really much more of a, it's almost, um ... it's a craft, right? So they're, they're really, uh, they're very hands-on. They're doing a lot. They're working their network. They're really trying to help these entrepreneurs build their businesses. The question is, what is the capacity to do that? And the capacity is two sides. One is how many entrepreneurs really deserve that much time and attention to have businesses that are that attractive? And then on the supply side is how many entre- uh, venture capitalists have the capital and the, the skillset to help them develop? And, you know, my guess is that those, those, the capacity is not as big as a lot of people think. So there's gonna be a bottleneck at, in terms of how many firms can actually do that at a very successful level. And this is sort of series A, uh, d- really adding value at the series A level. So I think when, the more the, the scattershot s- philosophy can be later rounds probably is where you're gonna see more of that type of thing. So that, that would just be my guess. It's not my area of expertise, but that would be my thought is to, to think a lot about that capacity issue. And when you get to early rounds, there's just, it's hard to stuff a lot of capital into these early round businesses.

   6. HSHarry Stebbings34:04

      It, it totally is.

10. 34:05 – 37:32

    Advice for Young Investors Seeing their First Downturn

    1. HSHarry Stebbings34:05

    2. MMMichael Mauboussin34:05

       Mm-hmm.

    3. HSHarry Stebbings34:05

       I, I do have to ask, you obviously, you know, uh, coach many people, you have students, you know, this is unprecedented market times and you have a lot of young investors going, "Oh shit, am I any good at this? (laughs) I, I thought I was." But this is a very new world and this is uncertain times for someone who's never done it before or seen it before. How do you advise younger investors looking at the markets today questioning whether they're any good?

    4. MMMichael Mauboussin34:31

       Yeah, I mean, well, it's sometimes hard to know if you are any good. The key is are you sticking to your process and, and trying to think about things the right way? And in mar- markets like this, there are a couple tendencies, uh, that can be, I mean, it depends what you're trying to do, but there are tendencies that can be problematic. One is to focus a lot on price swings. And, you know, price swings, uh, can ... both, both, both on the upside, by the way, and on the downside. So price swing, you know, you might think that, uh, upward price means that you're smart and downward means you're ... Okay, so, so try to focus less on that. And then the second thing is people tend to focus on macro events, right? So, oh, here's what the Fed's gonna do and here's what inflation's gonna do and here's what interest rates are gonna do and so forth. There is a large literature demonstrating that people are not good at forecasting those things, so it's not to say that you shouldn't be aware of them or you should not think about how those things might affect your business or the businesses you're looking after. But by the same token, sitting around and spending a ton of time on macro in my, from my point of view is not, is not great. So then the question becomes, what are we trying to do? And, you know, the key is we're trying to find, we're trying to buy stakes in businesses. And that actually at the end of the day is being a business analyst. And so, trying to keep people focused on the thing that they can control, the thing that they can understand. Um, they need to be aware of these other factors, but, uh, the, the ultimately focusing on the thing that is, that is core to the mission. So yeah, that's usually the advice. And, and the other thing, I, you know, it's funny. I, I was talking, I was just visiting with a bunch of clients and prospects and so forth, and everyone was like, "Oh, this is un- unprecedented times and uncertain" (laughs) and so forth. So I tell them the story that I started on Wall Street in the mid 1980s, and about 13 or 14 months into my training program, uh, was the crash of 1987. I was a trainee, so we were expendable, so I was sent to the margin department, and by the way, this is obviously pre-internet, really pre-faxes. We were sending Western Union telegrams to people, "Dear Mr. or Mrs. Jones, you owe $5,000 in your account, margin call." Uh, what I like to emphasize to people is the crash of '87 was the end of the world.Right? People don't realize that that was really bad, right? People were completely freaked out. It was stunning. We had seen nothing even remotely like this since the 1920s. And then I would encourage you now to look at a long-term stock price chart and go find the crash of 1987 on there and look at it and see, like, how significant it is, right? So the, at the time, it seemed to be very profound. At the time, it was earth-shattering and, and now with the, uh, in retrospect, uh, not that big a deal. So, you know, at, at some point, five years or 10 years from now, will we look back on today and say, "Oh, it was, yeah, it was challenging, it was bad, but look, we've advanced and, and the world is, you know, the world has moved on"? So that's the other thing, just to have a little bit of perspective of history to say that everything seems very dramatic in the moment, but, uh, given the benefit of time tends to, the, the impact tends to dull.

11. 37:32 – 39:15

    Comparing the Crash of 1987 to Today

    1. MMMichael Mauboussin37:32

    2. HSHarry Stebbings37:32

       Can I ask, what was the recovery like for '87? And is it right that, you know, we enjoy long periods of good times and actually the bad times, we spike out of them much quicker than we have the good times? Like, the recovery-

    3. MMMichael Mauboussin37:44

       Right.

    4. HSHarry Stebbings37:44

       ... is fast-paced?

    5. MMMichael Mauboussin37:46

       Yeah, and I think what happened, I think that was, what was unanticipated was that 1987, that the economy continued to do fine. So the stock market actually ended up okay for the full year of 1987 and actually was okay for 1988. So it, it ended up being a shock to the system that did not, you know, undermine the underlying economic conditions and, and things ended up being okay. But you're making a really important observation which is, you know, there tends to be, you know, the upside tends to be more gradual and the downside side tends to be more dramatic, and that is true and that's difficult psychologically for people as well. So that is a basic pattern. The other thing is interesting is that, you know, we, we think, you, we me- we talked about randomness before. You know, the random walk would say that randomness is sort, sort of like, there's equal distribution of, like, shocks in the system, but empirically in finance, we know that's not true, that we know that volatility and shocks tend to come in bunches, right? So it's, so you get quiet periods interspersed with periods of great volatility, then quiet and volatility and so forth. So what we're going through in public markets today is just that, which is you're gonna have these violent days on the upside and violent days on the downside. This is the volatility cluster right now that we're living through. We will come out of this at some point, it'll get quiet again and so forth. So, so just understanding these patterns and, and having lived through them before, understanding what they're about and recognizing that, you know, ultimately this too shall pass, and that's important for people to have that perspective as they think.

12. 39:15 – 41:00

    Pandemic & War: Are we in unprecedented times?

    1. MMMichael Mauboussin39:15

    2. HSHarry Stebbings39:15

       I think one thing that-

    3. MMMichael Mauboussin39:15

       Um-

    4. HSHarry Stebbings39:15

       ... worries me is unlike, you know, maybe prior financial crises where you've had, like-

    5. MMMichael Mauboussin39:20

       (clears throat)

    6. HSHarry Stebbings39:20

       ... bluntly financial mismanagement or wrong decision-making, here I think so much of, you know, uh, where we're at is because of, you know, a health pandemic in COVID, we have political conflict and, you know, a potential war that, you know, shakes so much of supply chains. What worries me is the instability of the world, not just financial markets, and does that make sense? And it feels like it's the first.

    7. MMMichael Mauboussin39:45

       It, it does, but again, you know, go back to take a, go back to 1900 and look at the history from 1900 to today and just ask yourself, "Oh, we had pandemic 1918, we had two world wars." I mean, we've had, we've seen all, we've seen versions of all these things over 125 years, right? So on, on some level it's always novel. It's obviously massively disruptive. Like you said, I mean, we've had more globalization in the last 30 years and as a consequence, supply chain effects are greater. But on some level we've seen versions of all these things in the past. And so again, it's, it always feels dramatic in the moment, it always, and it is, um, it's not, not saying it's not, but, uh, I, I think we have seen things like this. And by the way, on volatility is a good, an interesting one, go back and look at volatility and, you know, you see that the volatility we've seen in the last 10 or 15 years, even including the financial crisis, really, uh, doesn't hold a candle to the volatility we saw in the 1920s and '30s in the United States. There was vastly more volatility in, in stock prices. So yeah, on the one hand, it's always novel, it's always scary. (laughs) On the other hand, when you t- when, when the sweep of history, this is not inconsistent with things we've seen before.

    8. HSHarry Stebbings40:58

       I, uh, this is the final one, I promise.

13. 41:00 – 45:02

    The Value Reshuffling in the Public Markets

    1. HSHarry Stebbings41:00

       We mentioned-

    2. MMMichael Mauboussin41:00

       (laughs)

    3. HSHarry Stebbings41:01

       ... the volatility. On the value reshuffling that we've seen in public markets in particular, everyone's like, "I can't believe it. This company is, you know, four and a half X ARR. What is going on?" And my question is like, is this actually just the new normal and was it incredibly buoyant markets before that was unrealistic and irrational and this is the new normal, or i- is this a down period? I'm not even sure if this is a down period.

    4. MMMichael Mauboussin41:26

       You know, it's very interesting, Harry. I, I, the, you know, you mentioned COVID before, and just to dwell on that for a moment, I think COVID, um, was a huge challenge for a lot of companies, right? In other words, there was, for many young companies, there was demand pull forward, uh, and by the way, if you don't have a seasoned... Well, even if you do have a seasoned management team, it's difficult to manage through these things, and then you had sort of a regression back to more normal patterns. And so it was a very difficult period to measure, manage through, and by the way, even like, you know, world-class companies like Walmart and Target, you know, which have really good inves- managers and so forth and lots of data, they stumbled through, you know, Amazon, these guys all stumbled through this, right? And they're still kind of coming out the back end of it. So just to be clear that COVID, you know, a one-in-a-century type of event created a lot of management challenges. Now the flip side is when we talk about valuation, there are really a couple issues that are important. One is in equities we have this idea of, of implied duration, which is, you know, when am I getting my cash flows?

    5. HSHarry Stebbings42:23

       Mm-hmm.

    6. MMMichael Mauboussin42:23

       And for a lot of younger companies and more growthier companies, the cash flows don't come for, until many years into the future, right? So we're paying for the future to some degree. That creates sensitivity to interest rates, right? And so, um, you know, when the United States, for example, we went from on the 10-year, negative 100 basis points real interest rates, negative 100 basis points, today about 140 positive basis points. So it's a 240-basis-point swing in real interest rates.When you have long duration equities, that's gonna ... There's no place to hide. And by the way, that rise in real rates, there's been no place to hide at all in 2022, right? Whether you're in credit or equities, everything's been, uh, everything's been marked down as a consequent of that. Now the flip side is, uh, in terms of discount rates, there's also a nominal piece, right? And the question is if companies can be ... So you can't dodge the real rate increase, but you can dodge nominal rate increases if your company has pricing power. So this goes back to when we think about technology companies or any kind of company, are they delivering a good or service that creates consumer surplus? And if they're doing that, that either, they have either pricing flexibility or they can continue to, to, to delight their customers with their product or service. So, so thinking a lot about does this company create value above and beyond their price that creates some consumer surplus is really important. So yeah, I think that there's, in some ways, when you say like there's some inevitability, if you said to me, "Real rates are going from negative 100 base points to positive 150 base points," for instance, I would just say this is not gonna be good, right? (laughs) It's not gonna be good for long duration assets, bonds or, or stocks. On the flip side is, you know, maybe we're getting back to a more normal, in quotation marks, condition, right? Historically both real rates, even nominal rates, but real rates were, are way below where they've been, uh, historically and probably where they should be. We, uh, Al Rappaport and I did a revised version of Expectations Investing which came out about a year ago, but our final work was done in the fall, September 2020, so almost exactly, a little, little more than two years ago. The 10-year Treasury note yield in the United States was 90 basis points, below (laughs) 1%, right? That was two years ago. So, so are we just going back to more normal conditions? And that probably on, on balance is gonna be a healthy thing. So again, those are just ... I don't wanna justify anything, but these are the ways, maybe some ways to think about these things a little bit mathematically to, to, to maybe take a little of this thing out.

    7. HSHarry Stebbings44:49

       Michael, I could talk to you all day, but I am aware-

    8. MMMichael Mauboussin44:51

       Mm-hmm.

    9. HSHarry Stebbings44:51

       ... uh, it's a quick fire round time, so I'm gonna say a short statement and you give me your immediate thoughts. Does that sound okay?

    10. MMMichael Mauboussin44:57

        It does. Uh, (laughs) it does.

    11. HSHarry Stebbings45:00

        It's coming to the incredibly unfair moment

14. 45:02 – 45:57

    Michael's Favourite Book

    1. HSHarry Stebbings45:02

       when I ask you, I love also your background and then my background. (laughs) Like-

    2. MMMichael Mauboussin45:06

       Yeah, yeah, yeah.

    3. HSHarry Stebbings45:06

       ... books, books, books, nothing. Um, what's your favorite book, Michael?

    4. MMMichael Mauboussin45:11

       Um, can't, can't give you an answer to that. (laughs) No, I'm just kidding. I, there are too many. But the one I would say probably is, uh, I mentioned I'm head of Consilient Research, uh, is a book called Consilience by E.O. Wilson. E.O. Wilson's a, was a famous biologist. He died recently. But Consilience is about the unification of knowledge, and the argument that, that Wilson made that I, I'm very taken with this argument is that much of science is advanced through reductionism, so breaking things down to their components and understanding how they work, and many of the wonders we see around us are the consequence of that. Consilience is the unification of knowledge and, and the argument he makes is many of the vexing problems we have in our world will require, uh, combining different disciplines together to try to solve them. So, so to me Consilience, and I've been very involved for the last 25 years with the Santa Fe Institute. SFI is also very dedicated to this kind of a concept, so Consilience would be my book.

15. 45:57 – 47:10

    What makes Bill Gurley special?

    1. MMMichael Mauboussin45:57

    2. HSHarry Stebbings45:57

       Can I ask, what do you think makes Bill Gurley so special and the incredible ambassador that he is?

    3. MMMichael Mauboussin46:03

       So I think first of all he's very bright and he's very intellectually curious, um, and it, it is interesting. So I met him right when he got out of business school and joined, we were in the same research department, and right away I could see, I, I started talking to him about certain frameworks and ideas and he immediately not only understood them but integrated them. So two big ideas. One is he, he under- you know, we were talking about DCF and everything's a DCF model, I think he's very early on understanding the, the importance of return on capital, investment returns, cash flows, and he applied it right away, very successfully by the way, uh, in investments. The second is he was very early on in understanding Brian Arthur's work on increasing returns, understanding the mechanisms of increasing returns. In economics we're taught the returns on the margin go down, decreasing returns is a consequence of competition and, and maturation, but under certain circumstances you get these increased returns, so he was very early on. So, um, and by the way, not, not only a good investor but also a very good communicator, so he writes very well and, you know, y- y- anytime you see or give a t- you know, see the talks that he gives, they're very thoughtful, very well prepared. So yeah, it's, it's a combination of all of those

16. 47:10 – 48:00

    Michael's Biggest Strength/Weakness

    1. MMMichael Mauboussin47:10

       things.

    2. HSHarry Stebbings47:10

       What's your biggest strength and what's your biggest weakness?

    3. MMMichael Mauboussin47:13

       Uh ... (laughs) So if I had to, I, I don't like this question at all, but if I were to say strength, it'd probably be curiosity, just I am curious about the world, so I enjoy reading things and learning about things. And it's remarkable, even when I do research today we're gonna publish something, um, we're about to b- about to po- publish something and by the time this comes out it'll be out. You know, these are things we've written about before and I learn an enormous amount doing them for the second or third or fourth time, so curiosity probably is my answer to that.

    4. HSHarry Stebbings47:42

       And your biggest weakness?

    5. MMMichael Mauboussin47:43

       Oh, weakness. Uh, that's too long a list. Uh, that's a long list. (laughs)

    6. HSHarry Stebbings47:47

       (laughs)

    7. MMMichael Mauboussin47:47

       But I would say probably the problem is, uh, that I, I gravitate toward abstraction versus concrete. I try to be concrete in what I do, but probably try to, I try to, I probably am too high a level h- all the time and should probably be more grounded.

17. 48:00 – 48:18

    Best Investment Advice Michael Ever Received

    1. MMMichael Mauboussin48:00

    2. HSHarry Stebbings48:00

       What's the best investment advice you've ever received?

    3. MMMichael Mauboussin48:03

       Um, this is, you know, "This too shall pass," is the best investment advice, is I think people get very caught up in the moment, by the way, on, on things being too good or things being too bad, and the key is just to sort of maintain this, uh, equilibrium. This too shall pass.

18. 48:18 – 48:36

    Where would Michael invest $100k right now?

    1. HSHarry Stebbings48:18

       If I gave you $100,000, what would you do with it?

    2. MMMichael Mauboussin48:22

       I would probably just invest it in the stock market. Um, I think that, you know, when you look at even 2022, expected returns for equities have gone up a lot. I don't know if the markets are gonna be good the next month, three months, six months, but I think expected returns look pretty good. I would just put it probably

19. 48:36 – 49:56

    Michael's Biggest Investing Mistake

    1. MMMichael Mauboussin48:36

       in the stock market.

    2. HSHarry Stebbings48:37

       What mistake have you made in the investment world that in hindsight you wish you hadn't made?

    3. MMMichael Mauboussin48:42

       Yeah, I mean, those are easy 'cause (laughs) you just look at things that turned out badly. But I'll mention one investment, which is I bought Sears Holdings. Um, Eddie Lampert is the C-, was the CEO, and then I knew Eddie a little bit at the time. I really liked the way he thought. I l- liked what he was trying to do with the business. It ended up being a turned, it turned out very badly. Um, I'm not sure it was, it was a mistake in the sense that it turned out badly, um, but it's interesting because I liked his process and I was saying, like, "I'm gonna make a bet with the guy." Didn't turn out well, but that was, that would be one example.

    4. HSHarry Stebbings49:10

       Did that impact your decision-making?

    5. MMMichael Mauboussin49:13

       That he was a good guy?

    6. HSHarry Stebbings49:15

       No, that like, do you, does it change how you assess people?

    7. MMMichael Mauboussin49:18

       Well, yeah. I mean, this is another one where, uh, this is that, the Buffett, you know, likes to say, or I th- no, it actually starts with Peter Lynch, I think, where he says, you know, wh- when the, when a business, a challenging business, and a, uh, and, you know, when a, business and management, so if it's challenging business and brilliant management, it's likely the business's reputation remains (laughs) intact.

    8. HSHarry Stebbings49:38

       (laughs)

    9. MMMichael Mauboussin49:38

       I think that was a good example, which is I really liked the CEO but i- uh, the business itself was challenged, and, and the reputation of the business (laughs) was, remained intact. So that's a good, that's always a good lesson is that even great managers or even thoughtful managers, if they're managing a very difficult situation, uh, will have a difficulty-

20. 49:56 – 51:00

    Michael's Exercise Routine

    1. HSHarry Stebbings49:56

       Mi-

    2. MMMichael Mauboussin49:56

       ... uh, doing well.

    3. HSHarry Stebbings49:57

       Michael, I know you're committed to exercise and sleep. What do the exercise and sleep routines look like?

    4. MMMichael Mauboussin50:03

       So, um, I'll say, Harry, that, you know, we have, my wife and I have five kids, and so the kids are out of the house now, so when they were, when they were growing up, it was very difficult to maintain all those things. Now, as a, as a, you know, basically empty nester, it's great. So I'm very religious about sleep. I read, as many, many people did, Matthew Walker's book, Why We Sleep. It should be Why We Should Sleep More, and, uh, so I'm very religious about eight hours and try to really stay on that program, uh, and that, for me, is a huge cognitive lift. So, for, for, that's really important. I, I basically exercise every single day. So I, I grew up li-, as an athlete, played a lot of sports in high school and college, and basically work out every single day. So I'm very, like, tho- those are two things that are very important to me, and they really are important to my performance.

    5. HSHarry Stebbings50:47

       Why We Sleep, that was depressing. It's like, you know, you will become obese, uh, you will, uh, die young, blah, blah, blah. I was like, you know, let's-

    6. MMMichael Mauboussin50:54

       Alzheimer's, right? You know. (laughs)

    7. HSHarry Stebbings50:55

       Let's put, let's put this to one side, Matthew. Thank you for your wonderful wisdom.

    8. MMMichael Mauboussin50:58

       (laughs)

    9. HSHarry Stebbings50:59

       Uh, final one for

21. 51:00 – 52:25

    Why do you still do what you do?

    1. HSHarry Stebbings51:00

       you. "You've achieved so much, Michael. What does success look like for you? And why do you still do what you do?" That was from Bill Gurley.

    2. MMMichael Mauboussin51:07

       Yeah, I mean, I just, I mean, I love, I, I love what I get to do and I'm, I'm ver-, I'm very blessed, you know? Dennis Lynch is the guy that runs our team at Counterpoint Global, and Dennis, uh, is, is a great person to work for and work with. And, uh, so I get, I have a job that I get to do, I, I, I get to do what I love to do every single day. I hope that, um, I'm hopefully that it's contributing something to the world. And, uh, there's a sense of in-, independence and autonomy that's very powerful for me. And by, and by the way, I said this, I, I will never, a-, as long as I'm s- useful to somebody, I probably will never retire because I have way too much fun-

    3. HSHarry Stebbings51:41

       (laughs)

    4. MMMichael Mauboussin51:41

       ... and intellectual stimulation doing this. And I'll go back to what I mentioned before. I think that the, the key for me is this idea of inputting and outputting. And by the way, that's a big part of the teaching I do as well. So I teach at Columbia Business School. That output also, it shows up there. So always learning. And by the way, I, I really believe this passionately. I think the best teachers are great students. Right? The best teachers are great students. They're constantly learning about their topic, the nuances, and how to communicate in an effective way. So, to me, it's that input/output, um, uh, which, which hopefully will go on for as long as I'm around. (laughs)

    5. HSHarry Stebbings52:15

       Michael, this was such a joy-

    6. MMMichael Mauboussin52:16

       (laughs)

    7. HSHarry Stebbings52:16

       ... to do. I can't thank you enough for agreeing to it, and really, it's been a pleasure.

    8. MMMichael Mauboussin52:20

       Thank you very much, Harry. It was my pleasure.

    9. HSHarry Stebbings52:23

       You are a star, my friend. Thank you so-

    10. MMMichael Mauboussin52:25

        (laughs)

Episode duration: 52:25