How Warren Buffett's Genius Partner Tackles Complex Problems

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.

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 (BRK.A -0.30%) (BRK.B -0.26%) 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.