How Warren Buffett's Genius Partner Tackles Complex Problems

Mauboussin agrees with Munger that a basic understanding covering a range of disciplines is an important way for investors to build insight.

Mar 2, 2014 at 12:00PM

As Managing Director and Head of Global Financial Strategies at Credit Suisse, Michael Mauboussin advises clients on valuation and portfolio positioning, capital markets theory, and competitive strategy analysis. He has also authored three books -- Think Twice, The Success Equation, and More Than You Know -- and is an adjunct professor of finance at the Columbia Business School, and chairman of the Board of Trustees at the Santa Fe Institute.

Mauboussin recently sat down with the Fool's Matt Koppenheffer to discuss how Charlie Munger, and particularly his "toolbox" metaphor, has influenced his own multidisciplinary approach to investing. Knowledge of statistics is one of the most important tools in a good investor's toolbox, he says.

What's in your investing toolbox?
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

A transcript follows the video.

Matt Koppenheffer: I'm here today with Michael Mauboussin, Managing Director and Head of Global Financial Strategies at Credit Suisse, also the author of numerous investing books, including More Than You Know, and The Success Equation. Michael, thank you so much for joining me today.

Michael Mauboussin: My pleasure to be with you, Matt!

Koppenheffer: Let me start out ... way back when, when I got my hands on More Than You Know, it changed a lot of the way that I felt about investing. One of the things I thought was really interesting is, you bring a very multidisciplinary approach to investing, and it reminds me a lot of the way Charlie Munger goes about it. Have you gotten a lot of your influence from Munger and the way he approaches?

Mauboussin: Absolutely, and very directly. Of course, I'm a big Warren Buffett fan, I think as most people are, and a Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) shareholder, but for me in many ways Charlie Munger has been more influential.

I think the metaphor he uses is that of a toolbox. If you have one tool in your toolbox -- say, a screwdriver -- you're going to do a great job with screws, but when you're faced with different types of problems you're unlikely to be as successful. He says, "Build out your toolbox. Learn from different disciplines. Learn the big ideas, so when you're faced with a problem you can go to your toolbox to have the right tool to apply to the right problem."

It's this whole mental models approach, which requires reading across different disciplines. I always like to say, it's obviously fun to do -- there are a lot of intellectual cul-de-sacs -- but when you do face a problem that you've got a solution for, it's really exciting and I think it gives you a really exciting dash of insight.

Koppenheffer: In terms of pulling tools from that toolbox, one of the ones that Charlie Munger really likes, and has emphasized a lot, is knowledge of statistics, and I see a lot of that in your work. Do you think that's one of the key things that somebody needs, to be a good investor?

Mauboussin: I think there's no question. Good investing requires a few basic things -- accounting, understanding core things about business -- but statistics, I think, is incredibly helpful.

And by the way, it's not natural for us. I think most of us really relate much more to stories, and storytelling. As a consequence, if I'm telling you a story it's going to have a lot more salience for you than statistics.

But stepping back, thinking about the use of statistics -- for example, base rates in understanding businesses, what's happened before, what that's likely to mean for what's going to happen in the future -- I think it's incredibly helpful.

You need to learn the basics. You don't have to go to the high, fancy stuff, but just the basics can be extraordinarily helpful to clarify your thinking, in thinking about the future.

Koppenheffer: Going from there to what you were just talking about with storytelling ... there's a lot of story stocks. There's a lot to understand the narrative part of a business and a strategy. What are some ways that investors can avoid going into pitfalls by following that narrative part of the story?

Mauboussin: One of the constructs I love the best on this is what Danny Kahneman calls "the inside versus the outside view." When you're faced with a problem, all of us -- for example a stock or an investment idea, or even planning into the future -- the natural way for us to think is to gather a bunch of information, combine it with our own inputs, and plan into the future. And stories can be very powerful in developing that theme.

What he argues is better, is something called the outside view, which is saying, "Rather than thinking about my specific circumstances in this story, let me think about this as an instance of a larger reference class. What happened when other people were in this situation before?"

You might say of a story stock -- there are some explosive growth expectations -- you might say, "Are there other story stocks that were in similar situations before? What happened? How did the movie end?" This idea of the outside view, I think, can be very useful in tempering, especially the enthusiasm for these kinds of things, by referring to base rates.

That combines two things. One is the behavioral stuff, and also appealing to statistics, to some degree, to help inform your view.

Matt Koppenheffer owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information