A new issue of The Manual of Ideas is out! Inside, we take a look at the portfolio activity of the one hundred superinvestors we track, analyze twenty superinvestor holdings, and highlight three ideas as worthy of closer consideration. A special treat are two brand-new exclusive interviews with thought-leading investors Michael Mauboussin and Christopher Begg.

Michael Mauboussin Shares His Insights

Michael Mauboussin

Michael will be known to most of you as author of some of the most impactful thought pieces on investing, including topics such as skill vs. luck and measuring the moat. Michael serves as Managing Director and Head of Global Financial Strategies at Credit Suisse and is Chairman of the Board of Trustees of the renowned Santa Fe Institute.

Here is an excerpt of our interview with Michael, in which he sheds light on risk, volatility, and uncertainty. He starts off by distinguishing between risk and uncertainty:

First, I like the Frank Knight distinction between risk and uncertainty. Risk is when we don’t know what the outcome is going to be, but we do know the definable distribution. So rolling a die or flipping a coin would be risky by that definition. Uncertainty, by contrast, is when we don’t know what the outcome is, but we actually don’t know what the underlying distribution looks like. Distinguishing between those two things is a really good starting point. The distinction raises an interesting question about markets. Will you deem markets to be risky or uncertain? In finance, we use the mathematics of risk. If you’ve ever used words such as alpha or beta, you’ve contributed to that language. That language suggests that you understand what the underlying distribution looks like. But if there are elements, and maybe large elements, of uncertainty, a lot of that apparatus doesn’t work well.

Michael then goes on to distinguish between risk and volatility while bringing into play the dimension of time:

Second, risk has a temporal component. For example, a lot of value investors shun concepts such as volatility, or standard deviation, as a measure of risk — and I’m sympathetic to that point of view. That said, the notion of risk is very time-dependent. For very short periods of time, volatility is a pretty good way to think about risk. I have kids in college and I have to write a check for their tuition, so volatility is a very important concept for me. I want to minimize my volatility so I can make sure I can write that check. Or if you go out to an options desk and say, “Options traders, we’re taking away your measure of implied volatility,” they would actually be very much hamstrung.

Finally, Michael draws the following conclusion:

But if you take a long-term point of view, which most value investors do, then that idea of volatility melts away and, in fact, volatility becomes your friend. Risk then becomes the loss of permanent capital. You can bring these under the same tent by thinking about the temporal dimension. The way a long-term investor might think about risk would be, “I don’t want to lose my capital, I want to do things that are judicious”. Because of the life-cycle of investing, we’re all both short-term and long-term investors at some point. I’m a little bit more open about different ways of thinking about risk, with time being the key dimension.

(members of The Manual of Ideas, download the full interview.)

Chris Begg on the “Logarithmic Path” to Wisdom

Christopher Begg East CoastOur second exclusive interview this month is with Chris Begg, who is also one of our favorite writers on investment philosophy. If you are not a regular reader of Chris’s letters, I highly recommend checking them out. Chris serves as CEO and CIO of East Coast Asset Management, based in Essex, Massachusetts.

In our interview, Chris discusses his investment philosophy and touches on what he calls the “logarithmic path” to practical and investment wisdom.

Here is one of the book recommendations Chris shares in the interview:

In the category of human history, I think the book Sapiens by Yuval Harari is a foundational and important book for understanding the history of the human species. I have read it twice over the past few months. One of my takeaways, in synergy with insights learned outside of the book, is that the key attribute that differentiates humans from all of the species has been our ability to cooperate in large numbers. Humans cooperate in large numbers by sharing stories and myths that are handed down through generations, giving birth to religions and ideologies. These metaphors, which have important theoretical and spiritual meaning, are often confused as fact. All through history and through the world today, humans live and die for these metaphors. The stories we all talk about, our bucket #3, are the present day version of how we cooperate in tribes driven by the instincts of self-preservation, hierarchy, ritual, and territorialism.

(members of The Manual of Ideas, download the full interview.)

The Full Report

Curious about the full Superinvestor Issue of The Manual of Ideas that was just released? Take a look at what’s inside:

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Members of The Manual of Ideas, download the full monthly issue.

Future members (affectionately called), learn more about The Manual of Ideas.