More Than You Know: Finding Financial Wisdom in Unconventional Places

If you've grown bored or found yourself uninspired by the trite recommendations spewed out freely by the financial media, read this book and begin your cleansing process. More Than You Know will open your eyes to exciting ideas and hopefully, as it did for me, challenge you to explore many topics further. Overall, I found it to be an enjoyable read, as Mauboussin employs a matter-of-fact, pleasant writing style that makes for easy digestion of some complex material. The book is divided up into four sections: Investment Philosophy, Psychology of Investing, Innovation and Competitive Strategy, and Science and Complexity Theory. The Investment Philosophy section recommends to investors that they step outside their own field and draw insight from the practices of thinkers in other probabilistic fields, such as handicappers or poker players. These are people who practice what they preach and have the results to back it up. They emphasize process over outcome, take a long-term approach, and carefully ensure that the odds and probabilities are in their favor. The Psychology of Investing section offers a curious amalgam of behavioral finance, neuroscience, and the biological sciences to highlight many of the ways investors act suboptimally. Hundreds of thousands of years of evolution have taught us to rely on a variety of "rules of thumb," quite often for very good reasons. These heuristics, however, come fully equipped with a variety of biases, and these can lead us down suboptimal pathways. The key is "knowin' yourself" - as gambling legend Puggy Pearson said. The Innovation and Competitive Strategy section covers the two most important concepts in business today. With asset lives shrinking, product cycles tightening, and competitors unseating incumbents at a faster pace, this section is an important read. Mauboussin offers some powerful analogies here, such as that between the synaptic pruning process the brain goes through and the pruning processes of various industries, or that between the rapid life cycle of the fruit fly (2 weeks) and the accelerating pace of evolution in the business world. The Science and Complexity Theory section is clearly strongly influenced by Mauboussin's affiliation with the Santa Fe Institute. This is a place where Nobel Prize winning scientists like Murray Gell-Mann and Phil Anderson hang out, so it's not a bad place to go fishing for insight. A few of the chapters delve into the idea that the stock market is a complex adaptive system in which agents (investors) aggregate (via trading) and in the end produce efficient outcomes (most of the time). A few related chapters deal with the power of the collective to solve problems well and draw inspiration from such things as honey bee and ant colonies.

What impressed me about this book was that it made me think about applying some of the author's findings and theories to many different situations. I am really amazed at how well read the author is with regards to many different fields of study. The author's whole premise is that a multi-disciplinary approach is required to solve our big problems. Some previous reviewers have criticized this book because of no specific information that can be applied to investing. I have actually read this book 3 times in the last couple of months, because each time it causes me to think of different applications for some of the author's ideas. I make notes each time I read it, and after this 3rd time of reading the book, I disagree with reviewers about no specific things to apply to investing. Some of the specific ways of applying this books ideas to investing include: Recognize there are stock market bubbles of speculation on a periodic basis that are driven by investor psychology. When these bubbles appear, take actions to protect yourself from the inevitable bursting of the bubble including withdrawing from the market or use stop-loss type orders on stocks. Once a company reaches the Fortune 50, its annual growth usually stops. If your stock has done well and reached the Fortune 50, it is probably time to sell. The historical data shows that is almost impossible to continue double-digit growth rates once you hit this company size. Use asset allocation (diversify your investments) to avoid the risk of a fat-tail stock market loss dramatically shrinking your portfolio value. Bonds help to reduce this risk. Although not mentioned in the book, a lot of recent research indicates that low cost immediate annuities also reduce portfolio risk by shifting the fat-tail risk to the company providing the annuity. The Power Law (also called the 80:20 Rule, or Pareto's Law) can be applied to many things in investing. For example, you can simplify your investment portfolio to only 4 asset classes versus 12 classes because these 4 classes provide 70% of the benefits of diversification. Use index funds as the core of your portfolio. Index funds almost always win over active mutual funds. Be aware of reversion to the mean and that it happens to almost all companies. And last, watch CNBC for its entertainment value only. It is a form of financial pornography that does you no good with regards to investing. I would suggest companion books to supplement this book including: The Richest Man in Babylon Bogle on Mutual Funds: New Perspectives for the Intelligent Investor The Millionaire Next Door The Four Pillars of Investing: Lessons for Building a Winning Portfolio A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition Index Mutual Funds: How to Simplify Your Financial Life and Beat the Pro's The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life The Bogleheads' Guide to Investing Wealth: Gro

It is rare to find a book that fundamentally changes how you think about investing, and beyond that, learning. This is such a book. Mauboussin relies on a simple, but fundamentally non-consensus idea - that finding useful links between disparate fields, rather than focusing exclusively on one discipline, can make you a better investor. His sources range from Darwin to Dr. Seuss, his subjects from physics to ant colonies, but all of them are focused on generating conclusions and tips that will help you beat the market. More Than You Know builds a comprehensive investment framework in four chapters: 1. "Investment Philosophy" tackles how you should make investment decisions. Focus on process not outcomes, understand that the magnitude of gains and losses trumps their frequency, understand the psychological hang-ups that can lead to bad decisions, and realize sometimes we see patterns where they don't exist. 2. "Psychology of Investing" helps investors identify the pitfalls that prevent us from remaining objective such as stress, circumstance, and bias. 3. "Innovation and Competitive Strategy" teaches investors how to think about industry structures and how they are changed by innovation. In a world of accelerating change, Mauboussin demonstrates the folly of using historical P/Es, how you can profit from mean reversion, and how perception gaps are generated at predictable stages in a company's evolution. 4. Why can a group of people get to the right answer when no individual person actually has the answer? Why do seemingly small scale inputs often lead to massive and disproportional outputs in the stock market? The book's final chapter, science and complexity, answer these questions and posits a new model that is a better predicator of market behavior than standard finance - one that is consistent with empirical findings and can help you understand market moves more clearly. In 1998, Mauboussin wrote a report On the Shoulders of Giants, drawing its name from Isaac Newton's statement - "If I have seen further it is by standing on the shoulders of Giants." In this report, Mauboussin expounds Charlie Munger's view that investors must possess a variety of mental models drawn from the central tenets of many disciplines in order to be successful. Otherwise, you end up applying the wrong tool to solve a problem, or as Charlie Munger eloquently puts it - "To a man with a hammer, everything looks like a nail." This book gives you the tools to get to the right answer.

Every once in a while, the Muses conspire to change the things you do. For years, when asked for a recommendation of an investment book, I responded that "Reminiscences of a Stock Operator" provided insights each time I read it. The list is now longer. "More than You Know" by Michael J. Mauboussin has been added. The author, in 50 insightful essays, draws from the latest in behavior economics and cognitive sciences to give the reader invaluable insights into the concepts of risk and choice. His investment strategies are sound. They draw from creative thinkers as diverse as Warren Buffett and Steven Christ; they borrow from activities and fields as diverse as casino gambling and evolutionary biology. Mauboussin believes a multidisciplinary approach based on process and psychology offers the best opportunity for long-term investment success. He breaks his book into four sections: Investment Philosophy, Psychology of Investing, Investment and Competitive Strategy and Science and Complexity Theory. Although his essays are insightful, he provides a thorough bibliography to guide future study. Why the Muses moved to place this book in my hands last week, I do not know. But I am grateful they did. This book is a trove of knowledge and ideas. It is a must-read for anyone who takes their investing seriously.

Before one attempts to review "More Than You Know", it is useful to understand the author's background and context. Michael Mauboussin is Chief Investment Strategist of Legg Mason Capital Management. He is on the Board of Trustees of the Santa Fe Institute (SFI) and also teaches Security Analysis at Columbia Business School. Before Legg Mason, Michael was Chief U.S. Investment Strategist at Credit Suisse First Boston. During his career he has studied the objectives, resources and processes of successful investors; He has aggregated best practices of successful companies, competitive strategy, valuation and behavioral finance; He has studied the important principles of the major disciplines: Finance, Psychology, Mathematics, Physics, Philosophy, Biology, Evolution, History, Literature, Social Sciences. Michael has dedicated his career to one objective: The efficient and effective allocation of Financial and Intellectual Capital. One of Michael's fundamental beliefs, also one of the main themes of "More Than You know", is that to succeed in accomplishing your investment and life objectives, you need to understand the most important principles of the major disciplines: Finance, Psychology, Mathematics, Physics, Philosophy, Biology, Evolution, History, Literature, Social Sciences. This belief is also a driving influence of Legg Mason's investment philosophy, SFI's culture and the Security Analysis class that Michael teaches at Columbia. One of the barriers to learning the multi disciplinary approach to become a better investor and a better person is knowing how to properly filter the massive amounts of information (good and bad) that is out there. One of the ways to overcome these barriers is to find what I call filter/aggregators: someone with excellent judgment that has found the relevant knowledge, filtered it, and then aggregated the most important insights in one place for you. Examples of filter/aggregators in the investment world are: Bill Miller, Warren Buffett, Charles Munger and Michael Mauboussin. Michael's books (Expectations Investing, More Than You Know) and essays (Consilient Observer, Mauboussin on Strategy) are filled with investment insights, ideas from other disciplines that apply to investing and references to books, studies and essays by other authors. The purpose of "More Than You Know" is to show how a multi-disciplinary approach to investing can improve investment skills by giving investors fresh perspectives. The book is divided in 4 Parts/Categories: Investment Philosophy, Psychology of Investing, Innovation and Competitive Strategy, Science and Complexity Theory. Each part is made up of about 7 essays that describe major ideas of each category. In the essays Michael uses examples from business, successful investors, other authors, and studies from other disciplines to derive investment insight. Michael gives an appropriate understanding of the insights. In the eventuality that the reader would like to dig de