Wall Street's favorite strategist discusses -2-

There is also an important difference between experience and expertise. Expertise is when you have a predictive model that actually works, and you can gain valuable insights from it. Whereas experience just means you've been doing something for a very long time.

The final thing that I'm a big fan of is the concept of base rates. Rather than thinking only about your own assessment, you instead look at how historically similar scenarios have played out. Danny Kahneman was very famous for talking about combining your own inputs with base rates to come up with the best forecasts possible.

Keep in mind that most forecasts are probabilistic and that you need to be able to take different outcomes into consideration.

MarketWatch: One thing you often hear from professional investors is that "history doesn't repeat but it often rhymes." What are the limits of this kind of pattern recognition when it comes to investing?

Mauboussin: Again, it's very conditional and, by the way, investing has everything under the sun - some things that are stable and linear, and some things that are unstable and nonlinear.

The problem is all of us experience the world how we experience the world, and this leads to some very particular ideas about what can and should happen. Base rates hopefully open up people's minds about what's happened before.

The main point to make here is not to say that it's not useful to look at history or that pattern recognition always fails, but rather to be very clear about where it can be unreliable and where it can help us out. People in everyday life often aren't as clear about those delineations as they should be.

MarketWatch: Are there any topics that investors should be thinking about more?

Mauboussin: I think that one thing I would come back to and embellish a bit is I do think this issue of intangibles is really important - and I mentioned sort of a cure for that, which was to capitalize intangible investments and to amortize them, but the way to do that is very unsettled.

The second thing I'll say is that the characteristics of intangible assets are quite different from tangible assets. One example is a Taylor Swift song: Once she records it, it is an intangible asset that can be distributed far and wide at essentially no cost.

The challenge when it comes to valuing intangible assets is that they can face obsolescence rather quickly. You get less of that extreme when you're valuing tangible assets. Outdated software code is worth a lot less than a used truck.

Do we understand the difference between tangible and intangible assets? I think markets are pretty good at sniffing this out. But to be more focused on it perhaps and to shine a brighter light on it would be probably a good thing.

-Joseph Adinolfi

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06-21-24 0700ET

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