Michael Mauboussin, the Director of Research for BlueMountain Capital Management, is well known for writing detailed memos on competitive analysis of companies and investment processes.
He used to be the MD and Head of Global Financial Strategies at Credit Suisse and while there, also wrote many detailed articles on portfolio positioning and investment decision-making.
In an article written in August 2016, Mauboussin reflects on the top ten attributes possessed by great investors.
By learning from Mauboussin, you can be on your way to becoming a much better investor.
Here are the first two attributes – I shall be covering the rest in subsequent articles.
1. Be numerate
To be a successful investor, one has to be numerate.
Being numerate means being comfortable with numbers, using them for calculations and analysis.
Fortunately, you do not need to understand complicated math formulae or work with arcane mathematical concepts.
Investing involves just a basic understanding of numbers as they relate to ratios, percentages and probabilities.
Truth be told, most people with basic high school education in maths would be able to tackle such computations.
You need to have a feel for numbers and be able to tease out numerical information such as year on year changes in revenues and profits, profit margins and other metrics that demonstrate the financial strength of a company.
Numeracy is important because accounting is the language of business.
Armed with basic numeracy skills means you can learn to slowly decode how businesses are performing.
You can then gain insights into how a business has performed in the past and also gain some sense as to how well it will do in the future.
2. Understand value
Present value, or PV, is a concept rooted in finance theory.
In essence, PV states that free cash flows, when discounted using an appropriate interest rate (known as the “discount rate”), can yield the current value of an asset.
Discounting consists of a formula that seeks to quantify the value of cash flows being received in future periods to the present.
This way of determining the value of an asset that generates cash flows applies to equities, bonds and also real estate.
The problem with the real world is that future cash flows are always uncertain.
An investor needs to determine both the timing and amount of future cash flows to compute PV.
Reading extensively and knowing how the company is doing relative to its industry as well as its competitive moat are all important aspects used in determining future free cash flows.
Stay with us as we look at more attributes of great investors in future weeks.
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Disclaimer: Royston Yang does not own any of the companies mentioned.