Season 3 Episode 41:
Multiples are not valuation with Michael Mauboussin

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This week we’re speaking to Michael Mauboussin. Michael is head of consilient research at Counterpoint Global, as well as a prolific author and professor at Columbia Business School. We discuss the basics of security valuation, why using simple multiples is not valuation, how intangibles have reshaped valuation, market efficiency, good losses vs bad losses, and a framework for understanding sources of inefficiency. This episode is packed with insight and investing goodies which I am sure all listeners will value!

Links mentioned:

Some of Michael’s research:

We discuss:

  • Expectations investing – we discuss some of the core ideas behind Michael’s classic book:

    One key principle is that many investors skip over a crucial first step: assessing what expectations are built into the market price of a stock before doing a valuation
  • Valuation – using a PE multiple is not the same as valuation, it’s a shorthand for the process and embeds a lot of unexposed assumptions:

    We discuss Michael’s core principles of valuation including “everything’s a DCF model”
    Cash is a fact profit is an opinion

    Michael explains why a perspective on strategy is essential for valuation, understanding the unit economics, and setting the right unit of analysis
  • Intangibles – Michael describes the huge shift to the intangible economy over recent decades and the challenges this has posed to accounting security valuation:

    Accounting standards set up around a different world

    How can this be addressed, and how does it change the answers?
  • Market efficiency - how Michael is thinking about market efficiency and what it means for security valuation:

    The BAIT framework for assessing why and where inefficiencies and markets arise:
    • Behavioural
    • Analytical
    • Informational
    • Technical
  • Forward-looking – what is Michael working on for the next 12 months:
    • Intangibles
    • Capital and resource allocation
    • The role of market share
    • Fragility vs resilience. Optimizing for dynamic uncertain environments. Exploitation & exploration. Framework for the trade-off

What's one thing to take away?

The biggest lesson in investing is continual learning and being as actively open-minded as possible.

What's the most underappreciated thing about this area?

Temperament is more important than smarts. The ability to act countercyclically and fill in peak valleys.

Any recommendations?

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