Episode Summary
Executive Summary: In this podcast, host Tano Santos and guest Michael Mauboussin discuss the economic and market impact of the COVID-19 pandemic, emphasizing the temporary nature of the shock, the importance of focusing on business fundamentals, and the psychological challenges investors face. They explore how stress shortens time horizons, the role of myopic loss aversion, and the need for a disciplined, forward-looking approach to value investing during crises.
Main Topics: Economic and Market Impact of COVID-19 (Priority: 5/5): Analysis of the pandemic's effect on the economy and markets, including the uncertainty of the shock, the resilience of economies, and the role of policy responses. Value Investing Principles in Crisis (Priority: 5/5): Application of Graham and Dodd's principles, focusing on buying businesses with a margin of safety, assessing operational and financial leverage, and maintaining a long-term horizon. Psychological and Behavioral Aspects (Priority: 4/5): Discussion of stress, myopic loss aversion, and how psychological factors influence investment decisions during market turmoil. Market Structure and Passive Investing (Priority: 3/5): Examination of how the rise of passive investing and market concentration may affect market behavior during crises. Policy Response and Collective Action (Priority: 4/5): Comparison of different countries' responses to the pandemic, the need for centralized action to address externalities, and the impact on market clarity.
Key Arguments: The COVID-19 shock is temporary; economies and markets have historically recovered from crises, as physical and human capital remain intact. Investors should focus on business fundamentals: assess sales, costs, investments, and leverage to determine margin of safety under various scenarios. Stress shortens time horizons and triggers myopic loss aversion, leading investors to demand higher risk premiums and potentially sell at low points. Policy clarity and a coordinated response are crucial for market stability; uncertainty about the method to tackle the crisis prolongs volatility. The rise of passive investing has not caused disorderly markets, but concentration and superstar firms may affect long-term profitability.
Data Points: US GDP decline forecast: 13% annualized in Q2 2020 - Deutsche Bank note from March 18, 2020, comparing to 2008 financial crisis 10-year Treasury yield: 1% - Pre-crisis yield was 1.5-1.75%, used to argue for equity valuation Probability of market gain over 30-40 years: Almost certain - Used to illustrate myopic loss aversion and long-term investing
Pivotal Quotes: "If you take a three, five, seven-year view, at least history would tell you that who knows what's going to happen in the next three, six, twelve months, but history would tell you that it's probably not, you know, better, better than bad." — Michael Mauboussin: Advising long-term investors on market entry during the crisis "The key is to say, can I, again, train my eyes to the horizon to keep myself disciplined to say I will invest in these NPV positive things and not succumb to the sort of sting that comes associated with short-term losses." — Michael Mauboussin: Discussing the importance of maintaining a long-term perspective despite short-term losses "The very fact that assets costs are down usually means expected returns go up, right?" — Tano Santos: Highlighting the forward-looking nature of valuation and opportunity in downturns
Implications: Investors should maintain a long-term horizon, focus on business fundamentals and margin of safety, and resist emotional reactions to short-term volatility. Policy clarity and coordinated responses are key to market recovery. The crisis underscores the need for disciplined value investing principles.
About Value Investing with Legends
Value investing is more than an investment strategy — it's a fundamental way of thinking about finance. Value investing was developed in the 1920s at Columbia Business School by professors Benjamin Graham and David Dodd, MS '21. The authors of the classic text, Security Analysis, Graham and Dodd were the very pioneers of their field and their security analysis principles provided the first rational basis for investment decisions. Despite the vast and volatile changes in the economy and securities markets during the last several decades, value investing has proven to be the most successful money management strategy ever developed. Value investors' success over the second half of the twentieth century proved not only the validity of the value approach, but its preeminence over even the most widely taught and practiced modern investment theory, which was developed in the 1950s and '60s and remains dominant even today. Our mission today is to promote the study and practice of Graham & Dodd's original investing principles and to improve investing with world-class education, research, and practitioner-academic dialogue. In this podcast you will hear from some of the world's greatest investors, their views on the investment management industry, how they developed their investment process and how they see the field changing over time.