Some Thoughts On Improving the Predictive Value of Morningstar’s Ratings

By Jack M. Forehand (@practicalquant) —  The Wall Street Journal article last week that called into question the predictive value of Morningstar star ratings has caused a lot of debate in the investment industry. Many investors rely on Morningstar ratings to select funds and believe that selecting five star funds gives them the best chance of future outperformance. The Journal article shows that relying on those ratings to predict future performance is probably a bad idea. That really is not anything new to anyone who has studied fund performance because past performance has never really been predictive of future results, […]

Zweig: The Challenge of a Smaller Stock Pool

For stock pickers, choosing among a smaller universe of stocks is much more difficult, writes Jason Zweig in a recent Wall Street Journal article. Zweig cites data from the University of Chicago’s Booth School of Business showing that the number of publicly traded equities has dropped from 7,355 in 1997 to the current level of less than 3,600. The decreased number of stocks, writes Zweig, is attributable to regulatory tape (that makes it tougher for smaller companies to go public), the large sums of venture-capital funding available (so smaller companies can stay private for longer periods of time), and the increase […]

Mauboussin on Active Vs. Passive Management

A paper co-authored by Michael Mauboussin of Credit Suisse addresses important issues to consider in relation to the continued and increasing shift from active toward passive fund management. Those investors who are moving their money to passive funds, the paper argues, are “less informed than those who stay.” For every winner, it says, there must be a loser—and if there are fewer losers, the game becomes less interesting. In other words, as markets become more efficient (fewer losers) the potential upside for the winners (passive funds) is reduced. While associated with lower costs, passive fund management also “introduces the possibility […]

What Makes a Great Investor? Count to Ten.

“Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price,” writes Michael Mauboussin, managing director and head of Global Financial Strategies at Credit Suisse, in a paper published last week. Mauboussin shares his insights and reflections on how the investing world has changed over the past 30 years, the challenges investors face, and the importance of accounting as the “language of business.” He also outlines what he views as the “Ten Attributes of Great Fundamental Investors”: Be numerate. To be a […]

4 Ways On How to Improve Forecasting Skills, a Credit Suisse Report by Mauboussin

In the aggregate, forecasters may be “roughly as accurate as a dart-throwing chimp,” but some forecasters are particularly and consistently far better than average. Credit Suisse reports that the book Superforecasting: The Art and Science of Prediction by Philip Tetlock and Dan Gardner provides important insights into how to improve forecasting skill, perhaps by as much as 60%.  In other words, there are measurable differences between run-of-the-mill forecasters and “superforecasters,” and these differences can be a guide to improving forecasting skill. Drawing on Tetlock’s work, the Credit Suisse report, which was written by Michael Mauboussin and Dan Callahan, provides four key ingredients for managers seeking […]