Michael Mauboussin is widely thought of as one of Wall Street’s top analysts. He specialises in fundamental investing and the methods investors can use to improve and streamline their processes such as decision making, valuation and portfolio positioning.
In 2016, after 30 years on Wall Street, Mauboussin published a document outlining the 10 most prominent traits he had observed all successful fundamental investors as having.
The full document can be reviewed at this link, and below I’ve compiled the summary of these 10 traits along with Mauboussin’s comments.
“To be a successful investor, you have to be comfortable with numbers. There are rarely complicated calculations but a feel for figures, percentages, and probabilities is essential.”
Understand value (the present value of free cash flow)
“Great fundamental investors focus on understanding the magnitude and sustainability of free cash flow. Factors that an investor must consider include where the industry is in its life cycle, a company’s competitive position within its industry, barriers to entry, the economics of the business, and management’s skill at allocating capital.”
Properly assess strategy (or how a business makes money)
“Great investors can appreciate what differentiates a company that allows it to build an economic moat around its franchise that protects the business from competitors. The size and longevity of the moat are significant inputs into any thoughtful valuation.”
Compare effectively (expectations versus fundamentals)
“Perhaps the most important comparison an investor must make, and one that distinguishes average from great investors, is between fundamentals and expectations. Fundamentals capture a sense of a company’s future financial performance…Expectations reflect the financial performance implied by the stock price…Most investors fail to distinguish between fundamentals and expectations. When fundamentals are good they want to buy and when they are poor they want to sell. But great investors always distinguish between the two.”
“Investing is an activity where you must constantly consider the probabilities of various outcomes…Great investors recognize another uncomfortable reality about probability: the frequency of correctness does not really matter (batting average), what matters is how much money you make when you are right versus how much money you lose when you are wrong (slugging percentage).”
Update your views effectively
“Great investors do two things that most of us do not. They seek information or views that are different than their own and they update their beliefs when the evidence suggests they should. Neither task is easy.”
Beware of behavioural biases
“The ability to sidestep behavioural biases is likely part disposition, part training, and part environment. Great investors are those who are generally less affected by cognitive bias than the general population, learn about biases and how to cope with them, and put themselves in a work environment that allows them to think well.”
Know the difference between information and influence
“Great investors don’t get sucked into the vortex of influence. This requires the trait of not caring what others think of you, which is not natural for humans…Success entails considering various points of view but ultimately shaping a thesis that is thoughtful and away from the consensus.”
“Success in investing has two parts: finding edge and fully taking advantage of it through proper position sizing. Almost all investment firms focus on edge, while position sizing generally gets much less attention…Astute investors understand that finding edge and betting on it appropriately are both essential to longterm success.”
Read (and keep an open mind)
“Research shows that successful people read a lot and do so more for education than for entertainment. Reading is their primary means to continue their education. This habit is particularly important for investors, who must synthesize a huge number of inputs into actionable ideas.”