More Than You Know: Finding Financial Wisdom in Unconventional Places by Michael Mauboussin

I finished reading More Than You Know this week on a relaxing vacation in Denver.  The core premise of the book is to teach us about things that are loosely related to investing, but generally no investing strategy.  It is divided into 4 sections: 1. Investment Philosophy, 2. Psychology of Investing, 3. Innovation and Competitive Strategy, and 4. Science and Complexity Theory.

I’ll list some notes preceded by the chapter number they’re from.  The chapters are quite independent.

1. Robert Rubin’s Harvard graduation speech: There is no certainty.  Decisions are a matter of weighing probabilities.  Judge your decisions on process, not only results.

3. Separate probability and magnitude.  Too many people focus on probability. Keep good focus.

5. Risk: unknown outcome; known distribution. (roulette).
    Uncertainty: unknown outcome; unknown distribution.

9. Six psychological tendencies that encourage a positive response: 1. Reciprocation; 2. Commitment & Consistency; 3. Social validation; 4. Personal Liking; 5. Authority; 6. Scarcity.

10. Two important, overlooked properties of the stock market:
    a. Nonlinear: cause and effect are not neatly linked.
    b. Nonstationary: statistical properties change over time.
This means that our mental experiential system is poor at making decisions.

14. Value is created by organizing the world’s resources.  Today more people are inventing instructions (which organize them) and less are executing them (because they’re automated).  Thus the importance of education to keep up with standard of living increases.

15. Businesses in a free market are similar to synapses (connections in the brain).  In young industries many businesses form, and then they disappear.  At one time there were over 75 companies in the US Auto industry.  One investment idea is to look at survivors at the end of a bust period.  Like solid internet companies in 2002, or maybe solid banks at the end of this crisis?

16. There’s an interesting idea about how industries start somewhat slow, and then have a rapid growth at which point investors tend to expect the growth to continue for extended periods.  Basically you should buy leading companies just before growth ramps up, and sell after a lot of growth happens and it becomes unrealistic.  I want to read the book Gorilla Game which is related.

17. The company leadership cycle is getting shorter.  Microsoft is bucking the trend by staying in the lead for so long.  Can it last?

18. Strategy as Simple Rules.

20. PE ratio affected by: taxes, inflation, earning composition (tangible assets), equity-risk premium.  The author thinks the PE ratio is likely to remain high.

22. “Intelligence is all about making a guess that discovers some new underlying order.”
Need to read this and this.

26. Low-probability, high-impact events are the biggest problem in finance.

27,28. You frequently can’t link cause and effect in the stock market.

30. Companies that reach the Fortune 50 often stall in their growth. High growth companies fall within realm of chance. See paper.

In general I liked this book because it broadened my viewpoints, but I’m not sure there’s anything necessarily great about it.  I lightly recommend it.