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Thirty Years Reflections on the Ten Attributes of Great Investors August 4, 2016 Authors Michael J. Mauboussin
[email protected] Dan Callahan, CFA
[email protected] Darius Majd
[email protected]
Source: iStockphoto.
“Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price.”
The world of investing and business has seen a great deal of change in the past 30 years. This report shares thoughts on the ten attributes of great fundamental investors. Accounting is the language of business and you need to understand it to appreciate economic value and to assess competitive positioning. Investors face a slew of psychological challenges. Perhaps the most difficult is updating beliefs when new information i nformation arrives. Position sizing and portfolio construction still do not get the attention they warrant. The substantial shift from active to passive management has profound implications for the investment industry.
FOR DISCLOSURES AND OTHER IMPORTANT INFORMATION, PLEASE REFER TO THE BACK OF THIS REPORT.
August 4, 2016
Introduction
I started on Wall Street 30 years ago today. It has been a fascinating three decades, which is undoubtedly true of all periods of similar length. Notable events include the stock market crash of 1987, the fall of the Berlin Wall and unwinding of communism, the introduction of the Internet and the ensuing dot-com bubble, and a painful financial crisis and a subsequent recovery. Exhibit 1 shows a contrast between then and now. The indices for equity markets are roughly 10 times higher than they were in 1986, unadjusted for inflation and dividends, and the yield on the U.S. 10-year Treasury note is one-fifth of what it was. Of the top 10 companies by market capitalization in 1986, only General Electric, AT&T, and Exxon Mobil remain in the group today. Google, Amazon.com, and Facebook were not even dreams. In 1986, Microsoft, Oracle, Adobe, and Sun Microsystems went public. I have spent roughly two-thirds of my career on the sell-side and a third on the buy-side. Both experiences have been deeply gratifying and incredible learning opportunities. In this report, I offer what I believe to be the ten attributes of a great fundamental investor, as well as some thoughts on where we go from here. Before I do so, I provide some personal background and note the influences on my thinking. Feel free to skip directly to the attributes section on page six. Exhibit 1: August 4: 1986 and 2016 (based on the closing price the previous business day)
DJIA S&P 500 NASDAQ
1986 1,763.54 234.91 370.66
(inflation adjusted) 3,878.47 516.63 815.17
2016 18,355.00 2,163.79 5,159.74
Yield on U.S. 10-year Treasury note Dividend yield S&P 500 Cyclically adjusted price-earnings (CAPE) ratio
7.34% 3.5% 13.9x
Gold Oil
$361 $12
Cost of storage ($/MB) Cost of computing (100 calculations)
$71 $1
$0.0000633 $0.000001
Equity mutual fund AUM Passively-managed assets
$0.15 trillion
