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There is solid literature on the limits of arbitrage under normal conditions, when arbitrage opportunities tend to be steady and small. 15 Our emphasis here is on the failure of arbitrage in periods of financial crisis, where price-to-value gaps are wide and investors can put substantial capital to work at attractive returns. In financial stress, we see:
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From Modeling to Making Money
Our recent piece, “Death, Taxes, and Reversion to the Mean” 2, aimed to provide
context for analysts building financial models by documenting return on invested capital (ROIC) patterns for a large sample of companies. But the report was silent on the question most relevant for investors: Does an understanding of ROIC patterns help with stock picking? This piece addresses that question.
Three main points emerged from the analysis of ROIC patterns. First, analysts need to consider the lessons of history when modeling rather than approaching each model as unique. Analysts should view the experience of a large sample of companies as a rich reference class. Second, the empirical evidence shows ROICs tend to revert to the mean, a level similar to the cost of capital. Randomness plays an important role in the mean-reversion process. Finally, some companies do deliver persistently high or low results beyond what chance would dictate. Unfortunately, pinpointing the causes of persistence is a challenge.
In an efficient market, stock prices are an unbiased estimate of value. Market efficiency does not say that stock prices are always right; it only asserts that prices are not wrong in a systematic way. For this analysis, we combined our data on ROIC patterns with total shareholder returns to see whether there is a consistent way to generate excess returns.
This webcast comprises a 51-minute presentation and a 9-minute question-and-answer session.
Diversity Breakdowns and Invisible Vulnerability. For he who is acquainted with the paths of nature, will more readily observe her deviations; and, vice versa, he who has learned her deviations will be able more …
History shows crashes periodically arise from the market's inner workings. And crashes are not random--they tend to follow a distinct pattern, even if the assets or actors differ. However, psychology shows it is hard for investors to take advantage of the opportunities market crashes present. Awareness of these patterns and psychological pitfalls are the first step to succeeding in difficult markets.Direct Link - Anatomy Of A Market Crash.
Here is the summary :
It has been a bumpy ride on Wall Street this week. Could psychological theories help explain what is happening on the trading floor? Investment strategist Michael Mauboussin, author of More Than You Know: Finding Financial Wisdom in Unconventional Places, discusses the science of stocks.
Here is audio link or you can listen directly below. (About 18 minutes)
Here is highlight of the report :
The following is chapters of this talk :
Legg Mason Value Trust is celebrating its 25th annaversary. Read commentaries from legendary fund manager Bill Miller and strategiest Michael Mauboussin. Also included in the Commentary is a brief recap of LMCM’s 2006 Thought Leader Forum.
This is a old stuff, but I think it readable.
Michael Mauboussin had a Q&A session on FT.com's "Ask the expert" column. He answered questions on investment strategy and how understanding investor behavior could enhance investment strategy and returns.
Direct Link.
Michael Mauboussin, Chief Investment Strategist of Legg Mason Capital Management, released his latest report "Turtles in Omaha - The Mindset of Great Investors" on May 23. In this report, he talked about patterns of great investors' behavior, black swans - events that are outliers, human cognitive errors, and randomness.
Pdf Direct Link.
Podcast Direct Link.
