Investment guru tells us how to boost our returns

Investment guru tells us how to boost our returns

Michael Mauboussin is one of the world’s leading investment strategists. His recent paper focuses on how to anticipate revisions in expectations, which he regards as the key to generating attractive investment returns. We’ve provided a link to his analysis, which we think is critical reading for every serious investor.

Michael Mauboussin is well known to many of us.  He is currently the Head of Global Financial Strategies at Credit Suisse.  Prior to rejoining CS in 2013, he was Chief Investment Strategist at Legg Mason Capital Management.  He has been repeatedly named to Institutional Investor’s All-America Research Team and The Wall Street Journal All-Star survey in the food industry group.

Mauboussin is also the author of The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing (Harvard Business Review Press, 2012), Think Twice: Harnessing the Power of Counterintuition (Harvard Business Press, 2009) and More Than You Know: Finding Financial Wisdom in Unconventional Places (New York: Columbia Business School Publishing, 2008).

Mauboussin has been an adjunct professor of finance at Columbia Business School since 1993 and is on the faculty of the Heilbrunn Center for Graham and Dodd Investing.

The reason for introducing him here is that he recently published a paper in which he writes: “For a fundamental investor, anticipating revisions in expectations is the key to generating attractive returns. Sources of those revisions include fundamental outcomes (typically earnings revisions) and an assessment of how the market will value those fundamentals (multiple expansion or contraction). Investors who are able to forecast earnings in a year’s time that are substantially different than today’s expectations can earn meaningful excess returns.”

Many fund managers talk of ‘catalysts’, events that might make the market sit up and take notice and Mauboussin’s paper expands on perhaps the most valuable catalyst of all.

The paper covers:

• How analysts are commonly too optimistic about earnings growth and often miss estimates by a wide margin.
• A systematic way to assess earnings revisions with a specific emphasis on operating leverage.
• The drivers of sales growth and the value factors which determine the impact of sales changes on operating profit.
• Operating leverage, examining the relationship between the change in sales and the change in operating profit for the top 1,000 companies from 1950 through 2014.
• How operating leverage and financial leverage together determine earnings volatility.
• How sales growth, profit growth, and value creation do not always go together.

It’s a fascinating read and the paper can be found here.

Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery, find out more.

MORE BY RogerINVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.