||The Bias Blind Spot: This is our inclination to believe we aren't susceptible to the preceding behavioral biases that plague everyone else.
Mauboussin believes great investors are generally less affected by these behavioral biases because they acknowledge the existence of these biases, learning how to cope with them. They create a working (investing) environment that helps them "think well."
|7. "Think probabilistically (there are few sure things)."
The late Amos Tversky was a brilliant mathematical psychologist and author of highly regarded works on behavioral economics. Philip E. Tetlock, in his excellent book, Superforecasting: The Art and Science of Prediction, recalls Tversky telling him that most people only have three probability settings: "gonna happen," "not gonna happen," and "maybe."
If you aspire to investing greatness, this three-setting dial won't cut it. As Mauboussin says, superior returns come from constantly seeking an edge "where the price for an asset misrepresents either the probabilities or the outcomes."
Superforecasters – a group of ordinary folks who consistently out-forecasted their peers in the U.S. intelligence community – routinely demanded far greater granularity of themselves. The lesson they teach us is this: Your edge comes from digging so deeply into the problem at hand that you understand the finer-grained issues – and how they're likely to influence the outcome.
|8. "Update your views effectively."
Mauboussin says great investors do two things that most of us do not: 1) They seek out information and/or views different from their own, and 2) they update their beliefs when the evidence suggests they should.
As he puts it: "Beliefs are hypotheses to be tested, not treasures to be protected."
|9. "Position sizing (maximizing the payoff from edge)."
It's easy to forget that there are two aspects to superior returns: finding an edge, then exploiting it with proper position sizing.
If you develop a strong conviction for a particular investment but don't size it accordingly, you're not maximizing the potential payoff from your edge. That's why, in Extreme Value, we recommend subscribers allocate higher proportions of capital to our highest-conviction picks.
|10. "Read (and keep an open mind)."
Berkshire Hathaway's Charlie Munger says it best: "In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time – none, zero."
Many successful people make reading a priority. If you aspire to investing greatness, you should, too.
Every investor, novice or pro, should aspire to realize Mauboussin's 10 attributes. If you aspire to be a great fundamental investor, consider this your trusted playbook.