Mauboussin on Strategy

Over the last few weeks I have read all of Michael Mauboussin's (Chief Investment Strategist at Legg Mason Capital Managment) white papers on investing. Here are some of my favorite takeways with white paper titles headed in bold. You can find the white papers at this direct link:

Decision-Making for Investors
"Any individual decision can be badly thought through, and yet be successful, or exceedingly well thought through, but be unsuccessful, because the recognized possiblity of failure in fact occurs. But overtime, more thoughtful decision-making will lead to better overall results, and more thoughtful decision-making can be encouraged by evaluating decisions on how they were made rather than the outcome." - Robert Rubin

"Investing is a net present value positive activity; otherwise, savers would forgo current consumption in the expectation of greater future consumption. Inversely, with few exceptions gamblers engage in a netpresent value negative pursuit. The longer your time horizon in investing, the more likely you are to generate a positive return. The longer your time horizon in gambling, the more assured you are of a loss."

"Indeed I can be wrong more often then I am right, so long as the leverage on my correct judgements compensates for my mistakes." - Leon Levy founderof Oppenheimer Funds

Exploring Network Economics
"There is a central difference between the old and new economies: the old industrial economy was driven by economies of scale; the new information economy is driven by economics of networks." - Cal Shapiro and Hal R. Varian Information Rules

"Of networks there will be few. In a particular space one network tends to dominate, while the rest fight over the scraps. Network builders understand that anything other than first place is an also-ran. Microsoft and Ebay's 90%+ market shares offer testament to this point." - Brian Arthur, Economist

"We believe networks provide one of the few sources of sustainable competitive advantage. Once entrenched, dominant networks prove difficult to dislodge. Newtwork users become locked-in, and their switching costsrise sharply. Lock-in and switching costs are central to a network's sustainable competitive advantage."

The Economics of Customer Businesses
"Generally accepted accounting principles actually hide the value of a loyal customer, an impressive feat of concealment given what loyalty can do for the great majority of companies." Frederick F. Reicheld, Author of the Loyalty Effect

"First, acquisition costs tend to rise as an industry matures and companies compete for late adopters. Since the spending patterns of late are often not as good as earlier adopters, companies must make diligent spending decisions when the industry reaches maturity.On the other hand, if a customer business benefits from network effects, it can actually see acquisition costs decline as it gains share. Typically, multiple networks compete for customer attention, but once a company gets ahead customers want to join that network precisely because others alreadyhave."

"When companies properly calculate customer economics they often find avariation of the 80/20 rule applies: 20% of customers account for 80% ofthe profits."

M&M on Valuation
"Ideally, value investors can find businesses with prices below value where the value will increase over time. This value increase comes as management successfully deploys capital at attractive returns and fends off the migration to a commodity P/E multiple. In this case, value creation for the investor compounds in two ways - as the price to value gap narrows and as value grows."

Contrarian Investing
"We sometimes delude ourselves that we proceed in a rational manner and weigh all the pros and cons of various alternatives. But this is seldom the actual case. Quite often "I decided in favor of X" is no more than "I liked X".... We buy cars we "like" choose the jobs and houses we find"attractive", and then justify these choices by various reasons." - Robert Zajonc, Psychologist

"It is the long term investor, he who promotes the public interest, who will in practice come in for the most criticism... For it is the essence of his behavior that he should be eccentric, unconventional, and rash in the eyes of the average opinion. If he is unsuccessful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldy wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally" - John Maynard Keynes

Aver and Aversion
"It is a decisive fact about a person whether he possesses the freedom to act independently, or whether he characteristically submits to group pressures."- Solomon E. Asch

"It's possible that people who are ... good investors may have what you call functional psychopathy. They don't react emotionally to things." -Antoine Bechara

Clear Thinking About Share Repurchase
"A buyback of an overvalued stock can add to earnings per share while decreasing value for continuing shareholders and a buyback of an undervalued stock reduce earnings per share while enhancing value for ongoing holders. Thus, earnings-per-share accretion or dilution has nothing to do with whether a buyback makes economic sense because the relationship between the P/E and the interest rate dictates the accretion or dilution, while the relationship between price and expected value dictates a stock buyback's economic merits.

Repurchasing overvalued shares or refraining from buying undervalued shares because of the unfavorable earnings-per-share impact is shareholder unfriendly finance. Similarily, the notion that buybacks of high-P/E stocks are bad, or that buybacks of low P/E stocks are good defies economic reasoning."

Size Matters
"To suppose that safety-first consists in having a small gamble in a large number of different companies where I have no information to reach a good judgement, as compared with a substantial stake in a company where one's information is adequate, strikes me as a travesty of investment policy."- John Maynard Keynes