Michael Mauboussin headshotMichael J. Mauboussin is Chief Investment Strategist at Legg Mason Capital Management. Prior to joining LMCM in 2004, Michael was a Managing Director and Chief U.S. Investment Strategist at Credit Suisse. Michael joined CS in 1992 as a packaged food industry analyst. He is a former president of the Consumer Analyst Group of New York and was repeatedly named to Institutional Investor’s All-America Research Team and The Wall Street Journal All-Star survey in the food industry group.

Michael is the author of Think Twice: Harnessing the Power of Counterintuition (Harvard Business Press, 2009) and More More Than You Know: Finding Financial Wisdom in Unconventional Places (New York: Columbia Business School Publishing, 2008). More Than You Know was named one of “The 100 Best Business Books of All Time” by 800-CEO-READ, one of the best business books by BusinessWeek (2006) and best economics book by Strategy+Business (2006). He is also co-author, with Alfred Rappaport, of Expectations Investing: Reading Stock Prices for Better Returns (Harvard Business School Press, 2001).

Michael has been an adjunct professor of finance at Columbia Business School since 1993 and is on the faculty of the Heilbrunn Center for Graham and Dodd Investing. In 2009, Michael received the Dean’s Award for Teaching Excellence. BusinessWeek’s Guide to the Best Business Schools (2001) highlighted Michael as one of the school’s “Outstanding Faculty,” a distinction received by only seven professors.

Michael earned an A.B. from Georgetown University. He is also on the board of trustees of the Santa Fe Institute, a leading center for multi-disciplinary research in complex systems theory, and is on the board of directors of Sermo, an online community for physicians.

Below is his interview with Consuelo Mack from this past Friday. I took notes on his comments followed by the video of the full interview:

Many people think hard work results in better results, but this does not necessarily work in investing.

Often in investing more activity leads to better results.

Sitting tight while difficult might be the best action.

People like to buy assets that have gone up recently like tech stocks in late 90s, and real estate in mid 2000s.

Investors have lower returns than mutual funds they purchase because they have bad timing.

Buy and hold worked well if you bought cheap, like small cap stocks at the beginning of the decade.

Investing relies more on luck than skill in investing.

Pure skill would be a case of running a race, pure luck would be winning the lottery. Most things in life fall in the middle.

The paradox of skill says that when everyone is skillful at everything luck takes over, and this happens with investing. It is hard to beat the market since the big players in the market have a lot of skill.

Only over time will skill make a difference in investing.

There are three important characteristics of good investors.

1. Analytical edge- including how you position your portfolio. Best ideas should be more concentrated.

2. Behavioral- we tend to fall into certain traps like overconfidence. Mr. Market is an important concept, which was developed by Benjamin Graham. The key is to recognize you can ignore Mr. Market and buy when he quotes you cheap prices, and sell when he offers you expensive prices.

3. Institutional Barriers- Big investors follow the pack, because they are scared to have a track record that is too different from everyone else.

It is very difficult to find people who have all three of these skills.

For most people they should go with index funds.

People do not realize that dividends are not that important, price appreciation is only thing that effects capital apperciation rate.

Stocks are very attractive relative stocks, looks like absolute returns will be 8% for equities.

The yield on 10 year treasuries are depressed.

We are probably in an early phase of the recovery, big caps are cheap, and balance sheets are very strong.

Reversion to the mean occurs with portfolio managers like Bill Miller.

When CEO face is all over magazine, it is likely a sign that they have enjoyed good luck.

Quotes Seth Klarman that value investing is a mixture of contrarian streak with a calculator.

Do not be a contrarian for the sake of it, you need to also apply a calculator.

It is a combination that leads to great excess returns.

The most attractive long term fund would be the S&P500 in relation to the ten year treasury.

Steven Romnick of FPA will be on next.

Full video below: