Michael Mauboussin – Investing in times of (the Coronavirus) Crisis

Today's conversation is with Michael Mauboussin, Head of Consilient Research at Counterpoint Global. Before joining Counterpoint Global, Michael was the Director of Research at BlueMountain Capital Management in New York and previously the Head of Global Financial Strategies at Credit Suisse and Chief Investment Strategist at Legg Mason Capital Management. Michael has also authored several books and has been an adjunct professor of finance at Columbia Business School since 1993, where he is on the faculty of the Heilbrunn Center for Graham and Dodd Investing. As of this recording, the university campus is quiet and empty, with classes moving online for the spring semester. Of course, this is due to the coronavirus global pandemic which hit the world quite suddenly and has required extreme public health measures. The markets have responded as expected to the crisis and the economy is in a tailspin. In light of all of this, I wanted to take a slightly different approach to today's episode and have a discussion about not only how to think about markets, but also the psychological stress caused by the crisis. For that, I couldn't think of anyone better than our first repeat guest, Michael Mauboussin. On this episode, Michael and I talk about the debate on the economic impact of the coronavirus pandemic, the argument for the centralized implementation of public health solutions, using the expectations infrastructure to analyze companies, how stress affects investment decisions, how risk attitudes are shaped by loss and crisis, and so much more!   Key Topics: The two main sides of the debate on the economic impact of coronavirus (5:11) What pandemics and wars in the past demonstrate about the resilience of the economy (7:14) How Michael believes the economic impact of coronavirus will compare to previous world wars and pandemics (8:48) Why the response to the coronavirus crisis has been so different in Asia, Europe and the US (12:05) The argument for the centralized implementation of public health solutions (14:57) Framing the current crisis as an externality (16:21) Our theories about the sharp correction in equity prices (18:15) Will the current crisis measures result in long-term changes to our collective behavior? (20:03) The consistency of the underlying reality of financial markets (21:38) Assessing the effect of increasing concentration (24:11) Why it's so important to have a protocol in place for tackling the crisis (26:30) Using the expectations infrastructure to analyze companies (30:37) Measuring volatility as an indicator of risk in the short-term (35:01) Why psychological stress can have a bigger impact than physical stress (38:07) The conditions for psychological stress (38:44) How stress affects investment decisions (39:24) The interaction between psychological and agency issues during periods of massive uncertainty (40:28) How to reduce the stresses of social isolation during the coronavirus crisis (42:51) Teaching without in-person classes (45:04) What is myopic loss aversion? (46:42) How risk attitudes are shaped by loss and crisis (47:44) And much more! Mentioned in this Episode: Michael Mauboussin's Website Michael Mauboussin's Books Michael Mauboussin and Alfred Rappaport's Book | Expectations Investing: Reading Stock Prices for Better Returns Tyler Cowen's Bloomberg Article | Bill Gates Is Really Worried About the Coronavirus. Here's Why. Mancur Olson's Book | The Logic of Collective Action: Public Goods and the Theory of Groups   Thomas Philippon's Book | The Great Reversal: How America Gave Up on Free Markets     Thanks for Listening! Be sure to subscribe on Apple, Google, Spotify, or wherever you get your podcasts. And feel free to drop us a line at [email protected]. Follow the Heilbrunn Center on social media on Instagram, LinkedIn, and more!