As this newsletter is about becoming a better investor, I think it would be interesting to see what other investment professionals say makes a great investor. Michael Mauboussin wrote a paper in 2016 with Dan Callahan, CFA, and Darius Majd called “Thirty Years: Reflections on the Ten Attributes of Great Investors.” This topic of what attributes a great investor is very interesting because you can’t take yourself out of the equation. The investor is the one who makes the analysis and

takes the investment decisions. Even if you have a great investment strategy, it can be bad because you don’t have the right tools or personality to follow it and invest according to it.

When reading the paper, I can’t stop thinking about this section explaining the essence of this newsletter and how it benefits me and you.

“I had guest lectured for another one of our analysts, and agreed to teach Security Analysis in the summer of 1993. I have now taught that course for 24 years in a row (in 1995 I started teaching in the spring term). That experience has been a deep influence. When people ask me about what it is like to teach, I suggest they think about what it would be like to deliver 20 hours of lectures on what they do all day. At first you might think that is a pretty easy task, until you realize that articulating what you do forces you to think about what you do. As a natural consequence, you are likely to question whether there are better ways to do what you do. Teaching imposes a discipline of

understanding and communication that few other activities can—save perhaps writing. Inspirational teachers are also diligent students. So a commitment to teaching at a high level demands constant learning and consolidation of knowledge. There is the additional benefit of being

around young people who are bright and challenging.”

Mauboussin and his coauthor’s ten attributes of a great fundamental investor.

Accounting is like the language of business. If you want to truly grasp a company's value creation or destruction and its business model, you need to understand investing. Now, I'm not saying you have to become an accountant or auditor, but it's crucial to be able to adjust and analyze the three financial statements. Otherwise, spotting accounting red flags or uncovering fraud becomes a real challenge. Companies can easily mask problems in their income and balance statements, but it's

harder to hide things in the cash-flow statement (that's probably why it's usually at the end of the report).

Moreover, when it comes to valuation, what really matters is the present free cash flow. Earnings

can be manipulated to paint a picture that suits the management's agenda. Multiples may seem like convenient shortcuts, but they're essentially just a way to estimate discounted cash flows – which many investors find sufficient. On top of that, understanding accounting also helps you comprehend the business model better. Where does the company allocate its funds for products and marketing? How much do they spend on salaries? Do their operating expenses scale with their

growth? By diving into the financial statements, a savvy investor can gain valuable insights about a company.

So, remember, accounting knowledge gives you a leg up in understanding a company's financial

health, spotting potential issues, and grasping its overall business

model. It's like having a powerful tool in your investor's toolkit.

To become a successful investor, it's crucial to have a solid understanding of the companies you're investing in. This means delving into various aspects such as their strategy, positioning, vision, mission, and the competitive landscape they operate in. By gaining this understanding, you can assess the associated risks and determine whether the company has a competitive edge using frameworks like Porter's Five Forces Model (read more here Porter's Power Model).

Additionally, evaluating whether a company has a sustainable market share and profitability, often referred to as a "moat," is another key consideration. (read more here Moats) The strategy pursued by a company and its valuation are closely intertwined. That's why it's essential to comprehend the company's operations' intricacies to assess its valuation's fairness. By deeply understanding the company and its strategic direction, you can make more informed judgments about its financial worth.

Ultimately, connecting the dots between a company's strategy and its valuation empowers you as an investor to make well-informed decisions about potential investments. It allows you to evaluate a company's potential for success and determine whether its current valuation aligns with its underlying fundamentals.

Investing is a daily pursuit for investors, driven by their desire to achieve optimal returns on their capital. In equity investing and stock-picking, a key focus is comparing expectations to fundamentals. To a degree, investors in the market trade expectations with each other. A great investor can determine when a stock has too low or too high expectations in its share price.

As part of my investor journey, I'm immersed in "Expectations Investing" by Michael J. Mauboussin and Alfred Rappaport. I highly recommend this book to fellow investors who have already acquired some knowledge of the market and stock-picking. It delves into the concept of expectations investing, which may require a foundational understanding to grasp its nuances and implications fully.

It's important to emphasize a lesser-discussed aspect that aligns with the previous point. Thinking in probabilities can be challenging because we often prefer certainty and dislike leaving things to chance. However, the reality is that our world operates on probabilities, not absolutes. There is a chance that a startup will succeed in its endeavors, just as there is a probability that a massive trillion-dollar company will lose its once-unassailable market position. While both probabilities may below, they still exist. Great investors embrace and incorporate this perspective into their decision-making process, often called expected value (EV). They consider the likelihood of an event occurring

and its potential impact. Combined with the earlier point, it becomes a significant advantage for an investor. If they can accurately assess the odds in their favor and recognize when market expectations are overly pessimistic, they can position themselves for a highly profitable

future.

There is a saying, “Strong opinions, loosely held.” Which pinpoints this point very well. As an investor, you have a hypothesis about a stock, and you should always test it to see if it holds up against the best arguments. This is why short reports should be glad that someone has a different opinion. It challenges you, and if you see it is right, you probably should sell, not to lose money.

Maybe the hardest and one of the items that are probably hardest to train as your instinctive are working against you. When stocks go down and get cheaper (saying that nothing fundamental has changed), you should be happy because you can invest more capital for a higher expected return.

But we instinctively see this as a loss, either fighting or fleeing a loss. Fighting may constitute being aggressive on social media, and fleeing often sells the stock.

There are a lot of biases because investing is counterintuitive for us humans. Therefore, it is an uphill battle. But it can be won if you have a lot of insight into yourself and work on it methodologically every day.

We have a lot of noise in the market these days, we have more information than ever, and the signal (the valuable information) is hard to grasp. Today are many people and organizations to influence you to make decisions, maybe not direct investing decisions (but that happens also), which may not be in your favor. For example, a lot of analysis is commission-based, or investment banks talk positively about a company to be on a company’s good side if they want to raise money.

The sizing of different positions can be the difference between mediocre and great investors. A great investor knows when to bet more chips on the big swing! However, this is only if it is aligned with your pitch. If you are a thematic investor, you may have many more positions than a stock-picker that talks with the CEO of the companies he owns every quarter. The sizing needs to be a part of your investing strategy! Most important is to size so you can always come back and are

not knocked out!

READ! Studying and evolving, a great investor is never good enough! There is always something to improve on or understand better. Warren Buffett reads 500 pages per day. Maybe not your goal right away, but work your way up there.

I agree with all 10 of these. If I would add anything, would it be to turn on a lot of stones. To find great companies with great investment cases, you need to turn on a lot of stones. If this is one of the learnings from a study on 10 baggers, you can read more here: How to find 10-baggers.

Do you miss any attributes? Please tell me in the comments!

Happy hunting!

1) Be numerate (and understand accounting)

2) Understand value (the present value of free cash flow)

3) Properly assess strategy (or how a business makes money)

4) Compare effectively (expectations versus fundamentals)

5) Think probabilistically (there are few sure things)

6) Update your views effectively (beliefs are hypotheses to be tested, not treasures to be protected)

7) Beware of behavioral biases (minimizing constraints to good thinking)

8) Know the difference between information and influence

9) Position sizing (maximizing the payoff from edge)

10) Read (and keep an open mind)

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