Graham And Doddsville

The Value Investing Capital of the World

Archive for October, 2012

Professor Mauboussin on The True Measures of Success

October 28, 2012 By: webmaster Category: Behavioral Finance, CBS Faculty, Michael Mauboussin

The October issue of Harvard Business review included an article by Legg Mason Strategist and Columbia Business School Professor Michael Mauboussin titled “The True Measures of Success”.

About a dozen years ago, when I was working for a large financial services firm, one of the senior executives asked me to take on a project to better understand the company’s profitability. I was in the equity division, which generated fees and commissions by catering to investment managers and sought to maximize revenues by providing high-quality research, responsive trading, and coveted initial public offerings. While we had hundreds of clients, one mutual fund company was our largest. We shuttled our researchers to visit with its analysts and portfolio managers, dedicated capital to ensure that its trades were executed smoothly, and recognized its importance in the allocation of IPOs. We were committed to keeping the 800-pound gorilla happy.

Part of my charge was to understand the division’s profitability by customer. So we estimated the cost we incurred servicing each major client. The results were striking and counterintuitive: Our largest customer was among our least profitable. Indeed, customers in the middle of the pack, which didn’t demand substantial resources, were more profitable than the giant we fawned over.

What happened? We made a mistake that’s exceedingly common in business: We measured the wrong thing. The statistic we relied on to assess our performance—revenues—was disconnected from our overall objective of profitability. As a result, our strategic and resource allocation decisions didn’t support that goal. This article will reveal how this mistake permeates businesses—probably even yours—driving poor decisions and undermining performance. And it will show you how to choose the best statistics for your business goals.

The article is based on Professor Mauboussin’s new book The Success Equation:Untangling Skill and Luck in Business, Sports, and Investing which was released last week.

Both the article and book mention Michael Lewis’ Moneyball.  I think this clip from Moneyball provides a perfect analogy for Professor Mauboussin’s premise.

Meanwhile, in concert with my last post, I will begin adding material to the VI Resources, SI Resources, and Security Analysis pages.  Not all additions will make it to the front page of the blog, so check back to see what is new.

Fall 2012 Issue of Graham and Doddsville

October 11, 2012 By: webmaster Category: CBS Faculty, Graham And Doddsville Newsletter, The Heilbrunn Center for Graham and Dodd Investing, Warren Buffett

The students of Columbia Business School have posted the Fall 2012 edition of Graham and Doddsville.   It is fantastic as usual!

The new issue features CBS Professor Joel Greenblatt of Gotham Capital, Jim Tisch and Joe Rosenberg of Loews Corporation and Chuck Royce, Whitney George, Buzz Zaino and Charlie Dreifus of Royce & Associates.

If you have already blown through this issue (like I have), then click here for past issues of the newsletter.

Blog Update:

When I started this blog, in 2006, I had just been accepted to business school.  The value blogosphere was already established, but not to the extent it is now.

Fast forward 1 MBA, 2 kids, and a dream job later.   This, combined with a large increase in the quantity of high quality value investing blogs, has practically brought this blog to a halt.  I was made even more aware of this when I saw listed as a top blog in Jae Jun’s recent newsletter on Old School Value.  Next to the name was (inactive).

Well, it is time for a compromise.  I am moving off of the inactive list.  While future posts will primarily consist of links, articles, resources, etc., I do plan to update the site more often.

In the meantime:

1.  Read Warren Buffett’s essay The Superinvestors of Graham-and-Doddsville.  I bet you are thinking that I went too far back to basics.  I know you have already read it, but trust me…  read it again.   I bet that some new thought will cross your mind about how Warren Buffett’s argument just makes sense.

2.  Enjoy the latest issue of Columbia Business School’s Graham and Doddsville.