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.

Great investors understand the distinction between fundamentals and expectations, Mauboussin says. Just like winning at the track, winning as an investor comes down to identifying differences between fundamentals -- such as the price of a stock or the odds on a horse -- and expectations. What happens next at the company? How fast will the horse run?

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A transcript follows the video.

Matt Koppenheffer: In terms of setting up that process -- particularly, again, in terms of investing -- a lot of it boils down to figuring out what matters. In your experience, what does matter for investors? Are there particular numbers that matter more than others? Should investors be listening to conference calls? Reading press releases? What is it that does matter?

Michael Mauboussin: I think that the number one thing I would always say to everybody -- and I think this is the biggest mistake that people make -- is to always focus on the distinction between fundamentals and expectations.

These are two very different things. If you want to say it, fundamentals would be value, and expectations would be price. These are very distinct things, and I think great investors understand they're distinct.

Let me use, for example, a very easy metaphor to make this clearer. If you're a handicapper -- you bet on horses -- there are two things that are relevant.

One is the odds on the tote board, and those odds express very directly and clearly the probability of the horse's success in that particular race. The second thing is the fundamentals, which is how fast the horse is going to truly run in that particular race. That would be the horse's prior track record, the track conditions, the jockey, and so on and so forth.

Now it turns out, if I tell you the winner of every race, it doesn't make you money because it's all priced in. It doesn't make you money. The way you make money in horse racing is finding differences between expectations and fundamentals -- what the odds and tote board said, and how fast the horse is going to run.

That mind-set can translate right over to the world of investing. The key question you're always asking is, what's reflected in the stock price, and is the reality going to unfold in a way that's different than that?

All the things you described -- certainly, numbers can help give you some guidance on that -- but just be clear, the investment community is replete with noise, as well; lots of idle chatter, lots of talking heads that really don't make that much of a difference.

If you stick to this; my main thing is fundamentals versus expectations. When our expectation is running way head of what's likely to happen -- or way behind -- those, I think, end up being the most fruitful investments.

The last thing I'll say on that, it is often the case that when everybody is euphoric, you should be the one that's more concerned, and when everybody is scared is when you should be a little bit more optimistic -- and that's a very, very difficult thing to do, emotionally. Intellectually, you maybe can do it, but it's very difficult to do emotionally.

To me, fundamentals/expectations, and then getting into the mind-set of saying, "I'm going to try to do it differently than everybody else is doing."

Matt Koppenheffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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