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Here's Why You Need a Diverse Investment Club

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.

Research suggests that a more diverse group of investors makes better decisions than a single person or a relatively homogeneous group. Cognitive diversity -- which some people can even achieve on their own -- is the key.

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A transcript follows the video.

Koppenheffer: Another one of your recent works regarded forming good teams, and well-functioning teams. One of the things that I was just thinking about, from a bigger-picture perspective, is for an individual investor, for instance, is it wise to have a team investment approach? To have people that they're sharing their investments with, helping them make those investment decisions, or are they better off on their own?

Mauboussin: It depends!

That's one of those classic "it depends." There's actually been a really nice amount of work done on investment clubs. It's a little bit further than just having a bunch of people, but investment clubs. That work was done by Brooke Harrington.

What she found in studying this is that all-men groups and all-women groups didn't do as well as combined-gender groups. The premise behind that was that these combined groups were able to extract more diversity. They were able to get more differing points of view on the table, and that actually really enhanced their decision-making.

Going back to your question, the key to an effective team is to have diversity of thought, cognitive diversity; and to allow that diversity to rise to the surface, so it's not just having the information, but also talking about that information.

If you can find some friends, as an individual investor, who can help counterbalance you -- when you're overly optimistic to bring you down a little bit, when you're pessimistic to bring you up -- that can be extremely valuable.

Now, there's also evidence -- and there have been studies of this -- that some people can do this themselves, in their own head. They have the little diversity in their own minds. They've got their own movies playing.

But the idea is this notion of diversity is clearly what is the essential ingredient to making those good decisions, so whether you can generate it yourself -- that's awesome -- but if you need to, or you can, tap into another group of people to help you do that, that too is great.

Koppenheffer: But finding a bunch of people that agree with you already is probably a bad idea.

Mauboussin: Not probably -- it is a bad idea!

Koppenheffer: It's a very bad idea!

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Matt Koppenheffer

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