A Contrarian Streak and a Calculator

I just finished reading Michael Mauboussin’s “Reflections on the Ten Attributes of Great Investors”. The paper masterfully exposes the traits he has most encountered in outstanding investors over his thirty year career in finance.

The key to investing seems to be the ability to differentiate between personal and market expectations. That is, have a true Variant Perception (in the words of Michael Steinhardt) or Expectations Gap (Jason Karp). The best way to form one of these opinions is to think probabilistically and understand value. That is why Warren Buffet so eloquently puts it:

Value investing is at its core the marriage of a contrarian streak and a calculator.

To judge whether a security is under priced, investors first need to understand what the market is pricing in (or by the method of inversion, what it is not). The same way baseball teams scout their opponent’s starting pitcher prior to “play ball”, investors need to scout the market and other investor’s opinions before taking a position. If you can figure out how the sell side comes up with their “analyst estimates” and price targets, then you can also find their blind spots. These blind spots represent potential pockets of market inefficiency. Although they will not always provide you with the necessary evidence to form an opinion, they significantly reduce your signal-to-noise ratio.

Once the hard work of having an opinion is done, you reach Point 9 of Mauboussin’s reflections, position sizing. An equally important topic we will explore in the future.