Michael Mauboussin: Investment Success Which Matters Most? Luck or Skill

December 7, 2012

Luck versus skill in investing! How much does each matter to investment success? Our guest this week, Financial Thought Leader Michael Mauboussin has written a new book on the topic. Titled The Success Equation: Untangling Skill and Luck In Business, Sports and Investing, its conclusions might surprise you.

Michael Mouboussin is the Chief Investment Strategist at Legg Mason Capital Management , as well as an award winning Adjunct Professor at Columbia Business School where he has taught Finance for the past 20 years.

In our never ending quest to identify the best investments, strategies and professionals to help you build long-term financial security, luck almost never comes up. Now it will! According to Mauboussin, luck plays a large role in investment success, but there are strategies to use both luck and skill to your advantage.

WEALTHTRACK Episode #924; Originally Broadcast on December 07, 2012

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Guest Info

Michael Mauboussin
Chief Investment Strategist, Legg Mason Capital Management
Author, The Success Equation

Newsletter

Consuelo MackAs we follow the on-again, off-again “Fiscal Cliff” negotiations between the White House and GOP House leadership, (tonight it’s on-again according to The Wall Street Journal) it occurs to us that if it weren’t so important to the future of the economy, our job and our investments we would tune the whole thing out. But it is important, so we remain captive to the rumors, reports and innuendos as does the market.

Who, if anyone, has an inside track to how the “Fiscal Cliff” saga will end? I have no idea, but I do know that Wall Street firms spend tens of millions of dollars a year trying to give themselves a competitive edge, which is why this week’s guest says it is so hard for professional investors to outperform the market and each other on a consistent long-term basis.

How much of a role does skill play and how much does luck really contribute to investment success? Those are the fascinating questions posed by this week’s guest in his new book, The Success Equation: Untangling Skill And Luck In Business, Sports And Investing.

He is Financial Thought Leader Michael Mauboussin, who is the Chief Investment Strategist at Legg Mason Capital Management, as well as an award winning adjunct professor at Columbia Business School, where he has taught finance for the past twenty years. He is also the author of several books, including More Than You Know: Finding Financial Wisdom  In Unconventional Places, which was named one of the best business books by Business Week magazine.

In our never ending quest to identify the best investments, strategies and professionals to help you build long-term financial security, luck almost never comes up. We along with everyone else are always focusing on measurable data such as performance, price, correlations, and economic and market trends. We also look at process such as a firm or fund’s investment approach, a manager’s analytical skills and investment discipline, and we pay attention to less tangible attributes, their professional standing, behavior through different market cycles and reputation for honesty and integrity.

But how do you figure luck into the equation, which according to Mauboussin, has a lot to do with investment success? We’ll find out in this week’s interview

As always, if you can’t join us at the appointed hour on your local public television station, you can watch the show on our website as a podcast or streaming video. You can also find the One Investment picks of our guests and my Action Points there. For those of you who would like to see our program 48 hours in advance of the broadcast, you can subscribe to our WEALTHTRACK PREMIUM subscription service on the website.

Have a great weekend and a Happy Hanukkah for those celebrating this weekend! Make the week ahead a profitable and a productive one!

Best regards,

Consuelo

Action Point

Use Vanguard’s “The Truth About Costs” tool on their website –  you can see the returns lost and the returns kept over different periods of time depending upon the expense ratio paid and the average annual return you are expecting.

 

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One Investment

MAUBOUSSIN: HIGH EQUITY RISK PREMIUM

Underemphasize bonds

“I struggle with this, because I think today the most interesting anomaly that I see continues to be what is high equity risk premium. So in plain words, you think of a risk-free rate of return. In the United States, a 10-year Treasury note is a good proxy for that. And that’s today about a 1.8% yield. An equity risk premium is the return above and beyond that you would expect for taking on additional risk on equities. Now, over the long haul, that equity risk premium has been about three or four percent, something like that, and today, by most reckoning, it’s a lot closer to six percent. It’s very, very high. So to me, I don’t know if it’s bonds going down, in other words, yields going up because bonds going down, or stocks going up or some combination of these two things, but I have to believe, if you said to me three to five years what’s a good thing to bet on, I think it’s going to be that equity risk premium shrinking… so it could be, again, because of bonds doing poorly, equities doing well or some combination thereof.

Yeah, so I mean, go long equities would be one answer, but it’s really the relationship between equities and bonds I think is the most… equities versus bonds.”
-Michael Mauboussin

Transcript

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June 24, 2011

“Financial Thought Leader” Michael Mauboussin, Chief Investment Strategist of Legg Mason Capital Management, explains why its getting harder to beat the market and why doing less can actually make you more.


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