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A Foolish Interview With Michael Mauboussin

By Tom Gardner – Updated Apr 7, 2017 at 12:56PM

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Over the summer I had the good fortune to interview Michael J. Mauboussin, chief investment strategist at Legg Mason Capital Management and adjunct professor of finance at the Columbia Business School. We had an outstanding conversation about his views on investing and how we can get better, as well as his new book to be released soon, The Success Equation.

In celebration of our Worldwide Invest Better Day, happening on September 25, I encourage you to give this interview a listen. I guarantee you'll be a better investor for it!


Tom Gardner: We're joined by the chief investment strategist at Legg Mason (NYSE: LM) and an adjunct professor at Columbia University, Michael Mauboussin, and Michael, thanks for joining us. 

Michael Mauboussin: My pleasure. Great to be with you.

Tom Gardner: What are the role and responsibilities of chief investment strategists at Legg Mason?

Mauboussin: Yeah, I think it's probably a unique thing for our organization versus others, so I wouldn't generalize from this, but really I try to do two things primarily. One is to work with our team on investment process, so literally from how do you find mispriced securities ultimately to how do you make decisions. And when we talk about process, we typically, I usually have to figure out four building blocks. One is kind of capital markets efficiency questions, second is a lot of work on valuation, third, in-depth analysis of competitive strategy and fourth, decision making, which ultimately leads to a lot of portfolio construction issues. 

The second big set of responsibilities for me is as an organization we really do try to make, emphasize learning agility, so we want to make sure that we're paying attention to the good ideas in the world of finance and investing to state the obvious, but we also want to caste perhaps a bit wider net, and so I have got a bit of a carte blanche to read and to write about broader sets of topics and try to fold those back into what we're doing in our investment process, so they tend to manifest in these strategy reports. We have a book club internally. We do a conference called the Thought Leader Forum annually. Just ways to keep people thinking, learning, and growing intellectually.

Gardner: I want to talk a little bit about your theory of how to improve the quality of our decision making, and I wanted to just tee you up with three features that you focused on. One of them is having a decision-making journal, so the investors and members that will be hearing this interview and/or reading the transcript are focused on building their portfolio, typically through a mix of equities and funds, but our real concentration is on helping them find great companies to invest in for the long term. 

So step one, to improve their quality of decision making would be a decision-making journal. Can you explain...?

Mauboussin: Yeah, this is great. Many years ago when I first met Danny Kahneman, and Kahneman is one of the preeminent psychologists in the world who won a Nobel Prize for economics in 2002, even though he's never taught an economics class. 

When I pose him the question, what is a single thing an investor can do to improve his or her performance, he said almost without hesitation, go down to a local drugstore and buy a very cheap notebook and start keeping track of your decisions. And the specific idea is whenever you're making a consequential decision, something going in or out of the portfolio, just take a moment to think, write down what you expect to happen, why you expect it to happen and then actually, and this is optional, but probably a great idea, is write down how you feel about the situation, both physically and even emotionally. Just, how do you feel? I feel tired. I feel good, or this stock is really draining me. Whatever you think.

The key to doing this is that it prevents something called hindsight bias, which is no matter what happens in the world. We tend to look back on our decision-making process, and we tilt it in a way that looks more favorable to us, right? So we have a bias to explain what has happened. 

When you've got a decision-making journal, it gives you accurate and honest feedback of what you were thinking at that time. And so there can be situations, by the way, you buy a stock and it goes up, but it goes up for reasons very different than what you thought was going to happen. And having that feedback in a way to almost check yourself periodically is extremely valuable. So that's, I think, a very inexpensive; it's actually not super time consuming, but a very, very valuable way of giving yourself essential feedback because our minds won't do it normally. 

Gardner: The second one is a checklist, an investment checklist. What does that consist of? 

Mauboussin: So the best work on this I've seen is by Atul Gawande, who is a surgeon in Boston who wrote a book a couple of years ago called The Checklist Manifesto, and one of the points he makes in there is that when you go from field to field, wherever checklists have been used correctly and with fidelity, they've been extremely effective in proving outcomes. So we all know none of us would step on an airplane today without the pilot having gone through the checklist. It's been a big move into medicine, especially for example, in surgery where checklists have really made substantial inroads in reducing infections, for example, and hence mortality, and other areas like construction elsewhere.

So the question is, how do you become more systematic in applying what you know? And I'll just mention one other thing on this. There are two; Gawande talks about two kinds of checklists. By the way, this branch is right out of aviation. One is called a do-confirm checklist, a do-confirm, and that just basically says, Hey, just do your normal analysis the way you've always done it and been trained to do that, but stop periodically just to confirm that you've covered all the bases. So as an analyst that might say, hey, I'm going to do a really thorough evaluation work. I might look very carefully at return on capital trends. I might study the competitive strategy position. You are just going to do all that stuff, but you're going to stop every now and then, just to check to make sure you've done everything. 

The second one is called, the second kind of checklist, is called a read-do checklist. This is when you get into a difficult situation, for example you're a pilot and one of your engines goes out, the redo will guide how you should approach that problem. So you don't have to think about it so much, you just sort of go through it systematically. And so for an investor that might be hey, what happens when a company misses a quarter? What happens when they have a negative announcement or an executive departure? Sometimes that means sell the stock. Sometimes that means buy more. Sometimes it means do nothing, and a read-do checklist can help guide some of that thinking as well. So it's really a way to be structured and consistent in your analysis. 

Gardner: The third one actually, the pre-mortem, I love; we used to, on our NPR radio show, play a game entitled What Went Wrong? And we [unclear] incredibly popular stock in company, and announce to our audience, "This stock falls 50% over the next five years. What went wrong?" So tell us about the pre-mortem. 

Mauboussin: Yeah, so most people are familiar with a post-mortem, right? 

Which is a play off the same words, and a post-mortem is we bought this stock and it went down, so let's get around the table, talk about why we made the decision, how we got it wrong, as you pointed out, and see if there's lessons that we can glean from that. And again, post-mortems are very popular in different disciplines. 

A pre-mortem, and this idea, by the way, was developed by a social psychologist named Gary Klein. He has a very different concept. He says before we actually make the decisions, so we've not put any money to work yet. Let's launch ourselves into the future, and let's just say it's July 2013, a year from now. Let's say that we made the investment and it turned out badly. Now each of us independently should write down on a piece of paper, or maybe even write a little article about what went wrong. 

And it turns out when people go through that exercise, they are able to identify up to 30% more factors or variables than they would just standing in the present looking to the future. So somehow this idea of extracting yourself, putting yourself into the future looking back to the present, opens up your mind a little bit versus standing in the present and looking into the future. And it's a funny thing because you can think about all sorts of predictions people have made about the world, about whatever it is, about energy prices, gold prices, economic growth, what have you, and you can see it's very difficult to anticipate what's likely to happen, so pre-mortem can help open up your mind and get you to contemplate or evaluate these variables. 

Gardner: Could you define the term for us, "multidisciplinary approach to investing"?

 Mauboussin: Yeah, and I think this is an idea that I very much gleaned from Charlie Munger, who is Warren Buffett's; he is vice chairman at Berkshire Hathaway, one of Warren Buffett's partners. And the idea is, and I guess the metaphor I'll use is that of a toolbox, I think is the best one. So you could think about having a toolbox in your garage or in your workshop, and the question is, how do you want to populate that? Do you want to have one power tool, that if you were facing that problem with that tool you're going to do great every time so you're going to have a power screwdriver and every time you screw you do great with it? Or do you want to have a whole host of different tools so that when you face different problems you'll be able to pull the right tool from the toolbox to solve the problem? 

So the multidisciplinary approach is the idea that each discipline in the world, and you could say psychology, economics and sociology and ecology and various physics and various disciplines, each of those you can think of almost as having their own sets of tools, ways of thinking about things. 

And what [unclear] and I certainly embrace empathetic to this view, is that if you learn the big ideas from each of these fields, you don't have to be an expert in all the details, but if you learn just sort of the big ideas from each of these fields, it gives you a much broader toolbox so that when you're faced with different types of problems, you'll be able to pluck the right model, the right metaphor, the right analogy to be able to think of that problem effectively. So Munger's very fond of that phrase, "To a man with a hammer, every problem looks like a nail." If you have one tool in your toolbox, that is the tool you're going to use to solve every problem that faces you. The idea here is fill out that toolbox, spend time learning about various disciplines and see if those things can't help you solve problems more effectively.

Now there's good news and bad news. The bad news is it takes time to do that. You have to read and you have to think and you have to engage with diverse people. The good news, of course, is the payoff is tremendous, if you face diverse problems and can solve them more effectively. 

Gardner: Do you think it's important to, and do you at Legg Mason do historical research looking back at companies in different circumstances and understanding or trying to draw conclusions about why they succeeded or failed in a particular decade or period of an economic cycle or change in leadership? Is historical research an important part of your investment methodology or not so much? 

Mauboussin: It's a great question, and I think it's a very natural thing to do, of course, and it's also natural to draw analogies with current situations with the past. So studying the past I think can be very helpful, history can be very helpful, especially when you're evaluating managements. If their current managers, things like their capital allocation practices, and even like what strategic circumstances helped them or hurt them. 

The challenge with history, however, is that it's a very fickle teacher. Which is a lot of the key to understanding history is what the circumstances were. And what we tend to do when we study history is look for attributes, so circumstances versus attribute thinking. So let me see if I can give an example that would work.

One of the things that people who look back in history and say, It appears that companies that chose the path toward outsourcing were very successful financially. So you might say in the 1990s, it was Dell, more recently it has been Apple. Outsourcing seems like it's really a good thing. That's an attribute that should be good. 

Then you look at Boeing and their choice of how to construct the new Dreamliner 787, and it's a fascinating case because before they basically designed the aircraft at Boeing and then they sent out the designs to various suppliers and had them build it to spec and then they sent the thing back to Boeing, so Boeing controlled, most importantly, all the design aspects. For the 787 they decided to take a new tact, which is they literally outsourced the design to various suppliers. The first plane was supposed to come back in 1,200 pieces, which Boeing engineered for it to click together, the mechanics would click together. The first plane came back in 30,000 pieces, so it was a disaster and delayed the project for a number of years.

So what is the key? It turns out that the attribute of outsourcing is not in and of itself, good or bad; they key is the circumstance. And when an industry is early on, where vertical integration is really important, outsourcing makes no sense. You want to be vertically integrated, and only when there's successful modularization do you want outsourcing. So that's one kind of a problem, a circumstance versus attribute. I think it's really important. 

The second thing I'll mention very quickly, which I think is a very common mistake is under sampling failure. So for instance you might say, I'm going to look at companies that either have single product lines or multiple product lines, and you could say the single product line would be the riskier strategy and the multiple product lines would be less risky, right, because they're diversified. And then you look back and say which companies did better? And if you did that exercise, I think you would find that almost always you'd see the most successful companies are single product companies and the financial performance of multi-businesses...

Gardner: Like single lottery tickets. [Unclear] those are really great purchases.

Mauboussin: Right, and so then the question is, you're nailing it, right? So the question is not were the single line businesses the most successful? The question is, how did all single line businesses do? And so you need a sample of the successes as well as the failures, and we do that to get a much more complete picture. So it's a natural human proclivity to say let's find success and somehow believe that we can emulate that success going forward when you need to really look at the full sample of companies that pursue that strategy. So that's another reason that history is such a challenging and fickle teacher.

Gardner: As is always true of any conversation I have with anyone, any question I ask that you don't want to answer, you can simply say, Eh, I don't want to answer that one. So I'm going to simulate a hypothetical scenario and you tell me if you have any thoughts about how you'd attack this problem. It's a relatively common one. It's just a 55-year-old investor with say a half million dollars to invest in the final decade of their income stream. How would you be thinking about that as an investor? What are a couple of factors you'd be making sure were on your checklist as you built your approach heading into, toward retirement?

Mauboussin: You know, the first one is the common things, which would be measures of risk tolerance. I'd really want to figure out where that individual would be on the risk spectrum, how much they'd be willing to, what kinds of gains and losses. Second is I think the primacy or the importance of income for that individual, and I think that's one of the most challenging aspects of markets today, right? Because there's clearly yields in fixed income are very low. Certainly Treasuries have negative real interest rates, even with current spreads are historically relative to historical yields, not great. 

In equities where you do have some yield, this has been probably a big theme in the market for a while, but certainly for the second quarter, has been that everybody's been piling into basically bond equivalent-types of securities. So it feels to me like current yield is being bit up and future dividends or future buybacks are not.

So it's a tricky one. I guess I would try to balance some sort of, if income was important, some sort of current income portfolio with a handful of companies or funds that are positioned to take advantage of future dividend increases. 

Gardner: Do you have a suggested average holding period for stocks? Does Legg Mason target that or is it different by funds or is it by manager, and do you think that there's a preferable length for the average hold of a stock?

Mauboussin: That's a great question. We talk about three to five year time horizons in our own organization and I think our turnover statistics are quite consistent with that. But I would say this. It turns out that I'm less convinced of the importance of how long you hold a stock and more convinced that you need to just align your strategic, your analytical process to match that, right? So I think one of the biggest errors in the investment business is people claim to be longer-term oriented and then use processes that would be more short-term oriented. And of course the opposite would be true. If you're going to be short-term oriented in your portfolio, you don't want to be using the analytical approaches that are more long term oriented. So just make sure that those two things align. 

I would just hearken back. There is a great research which you guys know and have talked about that investors tend to earn returns less than the mutual funds in which they invest. And you say, well how can that possibly be? And the answer is the timings. So people tend to put money into things once they have done well, be it the fund or the market in general, and they tend to withdraw money when the fund or the market have done poorly.

And that leads to a material, in many cases a hundred basis points or more, of under performance relative to even the funds that they own. So I think on balance, if you say where should the friction be, my sense is that if you buy things that are undervalued or you buy a manager who you believe has a process that makes sense to you, if you're going to be reticent it'd probably be to swap out. The bias would probably be to hold it longer versus to hold it for a shorter time. 

Gardner: This may be obvious to you; I can imagine some of our members might not put these two together, so I would just like to have you elaborate on; describe a long-term investment made with short-term analysis tools. 

Mauboussin: Yeah, so that might be if you say I'd like to hold something for three to five years, for example, as your time horizon, and then you aimed all your analysis at determining whether you thought the company was going to beat the quarter or whether this new product was going to do a little bit better or worse. 

So all your analytical energy went into a very short term set of metrics. Whereas the long-term sets of metrics would be things you guys have talked about over the years a lot, which is what are the underlying returns on invested capital? What is the competitive advantage of this business? What are the long-term sustainable growth rates? Those kinds of measures that can be very noisy in the short term, but ultimately are things that are analyzable and that's what it's ultimately all about. So that might be an example of focusing on quarters of earnings rather than sort of the core economic model of the business.

Gardner: Something that's picking up momentum, kind of a steady drumbeat that seems to be gaining in volume and frequency in our communities are members of ours who are submitting or bringing forward what their financial planner or advisor is recommending to them. What's happening, I think, it's the Internet beginning to shine light on whether the recommendations or suggestions are prudent, appropriate, and/or without conflict. And I was just wondering if you have a view toward how the financial industry, in your opinion, or how Wall Street, to the extent that that term means anything anymore, treats the retail investor? And/or if you don't have a generalized view of that, what do you see as some pitfalls or some traps that you'd recommend that a family member of yours is beginning on a journey of managing their money and working with financial professionals, things that they should be looking out for? Products or fee structures that are danger zones for you. 

Mauboussin: Just this week in the news we had the discussion about J.P. Morgan brokers being encouraged to sell J.P. Morgan Investment Management products. I don't know any of the details on that, but there are some people that indicated they felt that that was; that there were conflicts of interest, so I don't know, but I suspect that that's not completely implausible.

To me, first of all, the key is to find an individual, a financial planner, who you really do believe that you can trust and that he or she will have your best interests at heart. This is an industry, like many other industries, not unique, but this is an industry that is going to lend itself to conflicts of interest, because what's often good for a financial advisor or financial planner, may not be optimal for the client. 

So I guess the two big things, first is to find people that you really do trust, and I think there are a lot of trustworthy people out there who really, truly take the client's needs and desires to heart, so finding that kind of an individual's really important. Maybe word of mouth is the best way to do that. 

And the second way to do it is really to be as informed as possible, and I think that the challenges; we've sort of had a lot of increase in complexity and there are a lot of different alternatives and a lot of things to think about, which makes it very daunting for a lot of people to try to get their arms around these issues. 

But the basic core idea I think most people can grasp, one is proper diversification. Another is, when possible, seeking low costs. So say you don't want to pay huge amounts of fees for the most part, unless you really, really know what you're getting yourself involved with. So I think those, the two things are finding the right people and the second is informing yourself to the best degree possible. I think that's probably the best advice I could give on that front.

Gardner: Would you ever buy a fund with a front load? Is there a scenario where that makes sense? 

Mauboussin: Yeah, I just don't know, I don't know. My bias would be; it would be a hurdle for me to consider that, but I guess I would never say no to anything. 

Gardner: What is your opinion of target date funds?

Mauboussin: I don't know enough about them. 

Gardner: I've just been reading a little bit more about them in the news and the kind of the fee structure and returns question gets raised again in that scenario, so I guess my last question on this topic of Wall Street and then I want to talk about your upcoming book. But what would be a question or two you would ask an investment professional to determine whether or not they're trustworthy and have your best interests in mind? We live in a world where a lot of people sit down with a financial professional and either don't know what to ask or wouldn't feel comfortable or wouldn't know if they should feel comfortable asking a question. So if you were sitting with a professional, what one or two questions would you ask them?

Mauboussin: The first thing I would probably do is just like probably a medical professional or anything else, is I would probably seek referral. So if I had trusted friends or family members who had worked with an individual and had positive experiences and felt that the individual was trustworthy, that would probably be my fist go-to. 

But the second thing, I would just probably sit down and I would ask questions like philosophies on costs. So how do we achieve a good result at a very reasonable cost to the investor, philosophies on diversification; I'd certainly want to know about that. I certainly would want to know about the individual's history, so have they had any problems in any way with their clients? Any sort of regulatory problems would be another thing I would look for. Certainly stability, so they've been at an organization for a long time versus moving from organization to organization. So those might be a couple of things that I would consider asking about. 

Gardner: Great. Before talking about the upcoming book, The Success Equation, I wanted to just have you briefly, just a sentence or two, describe any illusions of superiority, optimism and control.

Mauboussin: Yeah, I mean so we tend to be optimistic about our futures and those illusions are one of the reasons that people, psychologists have figured that out, seen why that's the case. 

The illusion of superiority basically says that we perceive ourselves as better than the people around us. Probably the best example, one you've heard before is if you ask people, are you in the top half of all drivers in terms of skill? About 80% of people will say yes, so people just give themselves as they walk around as being better than they are, and that leads to sort of a potentially dangerous degree of overconfidence. 

The illusion of optimism is that when we look into our own futures, we're more optimistic than we probably should be. And so for instance, if you go to college students and you say, you're about to graduate, you're going to go into the world, you'll have relationships and a career and health and so forth, do you understand these things happen? They all say yes, and they say now, rate your prospects for above average career, above average health, above average relationships, they will almost consistently view themselves as being very optimistic about their own prospects, even though they recognize that not great things happen to others. 

And the illusion of control is actually a very fascinating one, which is the idea that one, if we perceive ourselves to be in control of a situation, we deem the odds of success as being better than they are objectively, so just the sense of being in control, you start to think the odds are working for you. I have a really quick example, which I love, is they went to Las Vegas, researchers did, and studied people throwing dice and it turns out when people want high numbers, they throw the dice really hard and when they want low numbers, they throw the dice very softly, so somehow this notion that my control of the dice is going to have an influence on the outcomes.

Another example would be mergers and acquisitions, which is very; this is a much bigger issue, right? Which are companies who perceive themselves to be in control of a deal will deem the prospects of the success as much higher than they are objectively. So each of these illusions lead to perhaps perception that future outcomes will be a little bit better than they are based on a better measure of base rates, historically. 

Gardner: I want to stack those three illusions up against the competing philosophy and have you see if there's a winner or overlap or inclination of why one would work in one situation or another. So we have the illusions of superiority, we're better than we think we are. Optimism, we have more faith that things are going to go well and control, we believe we actually control the situation. I'm going to pin those against; it may not work that way, but I'm pinning against a quote that I hear frequently that I genuinely like. My brother loves this quote. It's from Henry Ford and it's a simple one that I'm sure you've heard before, "Whether you think you can or think you can't, you're right." 

Mauboussin: Yeah. I really don't have any reaction to that. 

Gardner: The reason that I stacked those against each other is that to me, what Henry Ford is saying is I believe that if I think I'm better and believe in my future more, and feel that I'm in control, I will actually get the [unclear], yeah, have a happier outcome and be more in control of situations around me. 

Mauboussin: A couple points come to mind immediately. Number one is that these illusions actually; Dan Gilbert wrote a great book called Stumbling on Happiness, and one of the points there is that we all have a little bit of; we kind of constantly trick ourselves. We have more optimism than is justified by the facts. And in fact, it turns out that people who are depressed, which is obviously a very difficult situation, but people who are depressed are much more realistic about the future. Actually, normal, healthy, mentally healthy individuals is going to be too optimistic, but that optimism, as you point out in the Henry Ford thing is what gets you up every morning and gets you to get out there and try to succeed, so there's something to that. 

And the second point I would just make is that I think there's just now a lot of good research that shows that hard work and grit and perseverance are really essential to success in any field, so anything that reinforces working hard and sticking with it and persevering is probably a worthy message as well.

Gardner: So tell us a little bit about your next book, The Success Equation. I know it's coming out in the fall, and I know we at The Motley Fool are excited about getting our hands on that book. 

Mauboussin: Yeah, it deals with a topic that is so fascinating and yet I think it's important everybody, I'm not sure that we're all very good at thinking about it, and that is essentially thinking about how to untangle skill and luck and the outcomes that we observe. So everybody knows, you say this, hey, your outcomes in life in a lot of different fields combine some element of skill and some element of luck, everybody sort of nods their heads, but if I ask you how much is a relative contribution of each, under but all the most extreme of situations, I think it's very difficult for people to think about. 

So the book has really three parts. The first part talks about why, a little bit the core idea in defining skill and luck and so forth, but also why we're, we have such a difficult time understanding skill and luck. And by the way, I think there are really two elements to that, and part of this went back to our discussion on the pre-mortem. 

The first is that we as humans are really causal agents. We want to understand the cause for every effect that we see. In fact, there's part of your left hemisphere, which psychologists have dubbed the interpreter, which is actually parts of your brain that'll make up a story to have a cause for every effect that it sees. So once we see an effect, we seek a cause and then we sort of, case closed. And that doesn't allow us to understand skill and luck.

And that leads to the second psychological thing, which is very difficult, which is we are all about narratives, we're all about stories, and so once something occurs, even if we didn't know it was going to happen, our minds then create a narrative, create a story to explain it, and then we are basically at rest. We're good with the situation, so something like the financial crisis happens and it's obviously a very complex, lots of different moving parts, but if you get a narrative as to what happened, then you can sort of say, I've got it, my narrative explains it, and then move on to the next thing. So that's the first part is just talking about definitions and why it's so difficult. 

The second part is really analytical and it rolls up the sleeves a little bit and says, Let's think about what is, what defines skill, what does a pattern of skill look like? What defines luck and then how do we actually quantify the relative contributions of these two things in various activities? For skill, by the way, well I'll say it's very common sense, which is it tends to follow an arc. It's easy to think about in physical terms. For example, as an athlete, you're say a tennis player, peaks at age 24, so you get better until about the age of 24, and then you become not as good as you used to be. So that's true. But it all turns out that same pattern holds for even cognitive tasks, and even for organizational lives, they follow this sort of arc. Talk a lot about luck, chapter on what makes for luck and a lot of that is how they're independent processes or dependent processes. 

The final section of the book is what to do about all of this. So if you do accept the role of skill and luck, how do you improve your skill, how do you manage luck and then kind of a wrap-up of the whole thing? So those three parts are sort of the introduction part, the analytical part and then kind of the what to do about it part. 

Gardner: If you were to roll all those sections up right now and be put on the spot and have to give a number from one to a hundred, the percentage to which you think Warren Buffettt is lucky as an investor. 

Mauboussin: You know....

Gardner: I think Buffettt actually gave a talk and I'm thinking it was at the University of Kansas about this, but...

Mauboussin: He talked about it in The Super Investors of Graham and Doddsville, that famous speech he gave in 1984, and this big part of his coin-flipping discussion. This actually leads into an important thing. So you could think of a continuum, literally draw a line on a piece of paper and on the left you could say all luck, zero skill, so this would be roulette wheels and lottery and those kinds of things. And on the right extreme would be all skill, no luck, and that might be a chess match or a running race or something like that, and everything interesting is obviously between those two extremes. I think if you think about it, investing in general is more on the luck side than it is on the skill side. I don't want to suggest to anybody there is not skill in investing. There is skill and there is differential skill, so some people are better at it than others. 

But the fact that markets are really hard to beat is one of the key indicators that there is a lot of luck, and by the way, there is a really elegant, fun test to determine whether there's any skill in an activity, and that test is ask whether you can lose on purpose. If you can lose on purpose, there has to be some skills. 

Now what's interesting about investing is we all now that it's really difficult to win on purpose right? To build a portfolio that beats a benchmark and does well, absolutely. Well what's also interesting about investing is it's actually really hard to build a portfolio that does a lot worse than the benchmark. So that gives you some indication that we're closer to the luck side.

Now Buffett I think by his own admission would tell you that; I mean I saw clearly he's very skillful and that skill compounds as you increase his longevity, but clearly he was also lucky along the way. That's another theme of the book, is whenever you see somebody that's extraordinary in terms of success and that often just uses a proxy, for example, financial success. Unless they inherited the money or something, you can be reasonably assured that they were both very skillful and very lucky, and you simply can't get to the extreme right tale of success in life without large doses of both. If you think about it, it has to be true that that's the case.

Gardner: Yeah, and I think Buffett views it that way. I think Buffett would probably say; I'll speak for him here, I think he would probably say that skill played a bigger role in his investments and luck played a bigger role in his life. 

Mauboussin: Yeah, but if (unclear), like Roger Lowenstein's great biography, you realize that when you look at a number of the investments he made along the way, a number of those, Washington Post and Buffalo News, these were things that sort of teetered and they could have gone either way and they went, the broke in a way that was favorable to him. I think they were good investments. They were thoughtful investments and he recognized the possibility that they might go sour, but they all kind of broke for him, and that I think; so in other words, if you played the world over and Washington Post had gone bankrupt or Buffalo News had gone bankrupt, you know what? Might things be a little bit different, would the trajectory have been changed? The answer is probably yes, I think he would concede that, certainly. 

And I think this idea that I define luck very specifically, because you mentioned something else about him, so I'm going to define luck as having three sorts of features. One is it happens to an individual or a group, say sports team or what have you. The second thing is it can be good or bad, so there's sort of symmetry. The values don't have to be symmetrical, but there's good and there's bad. And the third thing is that it would be reasonable to expect another outcome, so what happened was not the only thing that could have happened. 

And so often people say, Well gee, I was lucky to be born into the family I was born, right? Or I was lucky to be born at the time, and by the definition I just gave, that would actually not be lucky; that would be fortunate, and that's important, but it wouldn't be luck as I'm defining it. So I think Buffett was fortunate to be born when he was born with the skills that he was born with. That would not be luck by my definition, so that may be semantics, but that's; it's actually a distinction that's useful when you think about predictions. 

Gardner: Well I really look forward to reading the book. I will say I think we could build a portfolio that would fail, but if we were to build it in the retail client, the retail side of the market, a way to build a portfolio that fails is to ridiculously over actively trade such that fees grind down.

Mauboussin: Right, so the way to carry out that experiment, right, you'd have to do the portfolio that does really well and the portfolio that you think will do well and the portfolio that you think will do poorly, and then you have to match the costs, you have to match the costs. So then what it distills down to is simply what you've put into it. There's an interesting article, John Rogers at Ariel Investments in Chicago wrote an article in Forbes a few years ago where he asked his investment professionals to do just that. It was only for a quarter, but he said, give me the ten stocks that you're most optimistic about and the ten stocks you think are really going to do poorly, and when he tied up the results, actually the short portfolio, if you will, did better than the long portfolio. It was an unusual time, '09 was an unusual time in the markets, but that sort of gives you an indication that it's not; the point is to be recognized is it's not easy to do either of those things. 

Gardner: I would like to close with two quick questions. One of them, what are your special skills at time management, given how much you do in your life?

Mauboussin[Laughs.] I wish I had some. I'm not sure I do have special skills, but I think the main thing for me is that I'm, and this is a Buffett thing, I'm very blessed to do a lot of things that I love to do, so for me, there's really no, very little of what I do are things that I don't enjoy doing. So every morning I wake up and I'm really excited about what I get to do. In that same context, I basically don't stop, so a lot of what my job is about is reading things and trying to think about things, so I'm able to, and have been blessed to allocate an enormous amount of time to doing that.

The second thing that I really; I'm sure this is all your, all the listeners and all the guests appreciate this, but I really do try to be very methodical about eating properly and sleeping properly and exercising properly and I find that when I'm doing those things well, that really also adds to my productivity for the rest of my time. 

The other thing is, you mentioned personal life. I've got a wonderful wife and a great family, and those things are extraordinarily great, so there's no; just having a great support system and a really wonderful place to be every day with a family also has been a huge blessing that also helps a lot professionally.

Gardner: Final question, who's one investment thinker that may be off the radar of investors that you think we should be following, reading and learning from. 

Mauboussin: You know, that's interesting. Most of the guys that I read about are people who are on the radar screen. One of the guys who I really like a lot is, this may be a little bit self-serving, but is a former student of mine, and that's Todd Combs, who just joined Buffett about a year ago at Berkshire Hathaway, so Todd's on the young end, and he took my course ten years ago. But he's one of these guys that very quietly just reads an enormous amount, very, very thoughtful and so I'm not sure a lot of people know a lot about him and I'm sure he probably tries to keep a low profile, but he's a guy that over the years, I would keep an eye on him and listen to what he says and hear what he reads. I think he'll be a great guy to learn from. 

Gardner: Wonderful, Michael. Thank you so much for taking these 45 minutes out of your day, and you always have a second home at Motley Fool Global Headquarters and we look forward to having you in the fall when your new book is out.

Mauboussin: Yes, thanks a lot, Tom. Great questions and great conversation. I really appreciate it.

Gardner: Thank you. 

Tom Gardner is CEO of The Motley Fool and advisor for Motley Fool One. He owns no shares of any companies mentioned in this article. The Motley Fool has a disclosure policy

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