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Thoughts 02_18_14 - Michael J. Mauboussin

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February 18, 2014 – Comments (1)

I listened to an interview with Michael J. Mauboussin on the motley fools podcast "where the money is" today.  I have to admit his insights really intrigue me, and he didn't disappoint this time.  I loved his discussion of the P/E being a two part calculation.  One part being the current run rate and the other being the increase that any investments in the business creates. He said that the average run rate for the market is a P/E of 12.5.  Therefore, if the P/E is over 12.5 then the market assumes that the company will create value with investments in the business.  And if the P/E is under 12.5, then the market assumes the company will destroy value into the future. 

He also talks a lot about statistics and probabilities and how important it is to think in these terms when investing. He uses the example of looking at an investment from the inside vs outside.  The outside allows you to ask questions about what happened to companies in similar situations in the past.  The inside view has you collecting data and combining with own knowledge to help develop a decision.  He argues that the outside is better because you can use probabilities and not be seduced by the story.  Where humans are more taken with stories than with statistics.

I love that he suggested having an investing journal and keeping probabilities there.  I've been looking for what my blog was missing; I knew it was missing something and his suggestion hit the spot.  

I also found intriguing the study he cited that all men investing clubs and all women investing clubs didn't do as well as clubs that are co-ed.

Last, it was really bizzare that they spoke about checklists and their use in medicine and aviation.  Why bizzare, I just picked up the book "Checklist Manofesto" last weekend which is what they were referring to without referring to it explicitly. 

1 Comments – Post Your Own

#1) On February 19, 2014 at 3:02 AM, awallejr (81.59) wrote:

The only real stat you need to look at is earnings.  Revenue first, P/E second.  Revenue first because that number can't be manipulated.  I would use P/E 15 as the "average" number.  But it does depend on what sector you are looking at. Some sectors command more and some less.

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