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Michael Mauboussin, Columbia University finance professor and head of Morgan Stanley’s Consilient Research program, is probably my favourite thinker on markets. For one, he wrote what I believe is the single best short paper ever aimed at both new and experienced investors during his tenure as chief investment strategist at U.S. asset manager Legg Mason.

Mr. Mauboussin recently sat down with Institutional Investor for an interview and his responses were typically insightful.

When asked for the primary differences between good and great investors, Mr. Mauboussin answered “[it] rarely has to do with the tools they’re using but rather relates to their skills in decision-making — especially during challenging and stressful situations.”

This is a key point. Great investors can use a variety of tools. Momentum-based indicators like trailing six month returns are one example. Mr. Mauboussin favours cash flow and profitability multiples like return on invested capital.

But when and how to apply these techniques in market transactions with the highest probability of success determines performance.

Another important insight - and a controversial one - is that investors pay too much attention to common valuation multiples like price to earnings and price to EV/EBITDA (enterprise value divided by earnings before interest, taxation, depreciation and amortization). His analysis shows that these simple valuation techniques – which he admits using himself occasionally as shorthand – incorporate too many economic assumptions to be definitive regarding stock values.

Mr. Mauboussin’s new book, written with economist Alfred Rappaport, is called “Expectations Investing: Reading Stock Prices for Better Returns”. It details their preferred investment strategy, how to assess the growth prospects embedded in stock prices and where they diverge from an expected value. This expected value is derived from probability-based scenario analysis. He summarizes the approach as “We start with the only thing we know for sure — the price — and then assess what has to happen to realize an attractive return.”

I highly recommend investors read the entire interview. It includes further insights on why the best market forecasters are usually the best at filtering market noise, the importance of cost of capital in analyzing a company, how maintenance-based capital expenditure resembles the animal kingdom and when index investing might begin to distort stock prices. There are few more credible sources for these discussions.

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Calian Group Ltd. (CGY-T) Ottawa-based Calian is a company that operates four business segments: Health, Advanced Technologies, Information Technology and Learning. The stock experienced blistering growth in its share price in 2020 and 2019; however, the positive price momentum stalled in 2021. Year-to-date, the share price is down 13 per cent with the stock now approaching oversold territory. Is this a buying opportunity? Jennifer Dowty looks at the investment case.

Algonquin Power & Utilities Corp. (AQN-T) Several readers have expressed concern about this utility stock. Fear not: John Heinzl explains why the shares have fallen and why investors with a long-term focus needn’t worry.

The Rundown

Amid many winners, there are still losers on the TSX

For a blockbuster year in the Canadian stock market, there are a curious number of big losers in the benchmark index. Roughly 17 per cent of the companies in the S&P/TSX Composite Index are down by at least 10 per cent year to date, while 9 per cent are down by 20 per cent or more. One possible explanation: With inflationary pressures building, the market’s preferences have shifted toward the largest companies on the exchange, which typically have a greater ability to pass rising prices onto consumers. Tim Shufelt explains.

Also see: Investors bet on second wind for lagging U.S. small caps

An ETF investor eyes a high-cost mutual fund with strong returns

Mutual funds are mostly run by stock-pickers who have their ups and downs over the years. Add them up, fold fees in and you too often end up with returns that fall below what index-tracking ETFs deliver. Many investors have come to this realization and chosen ETFs for their portfolio, including a reader who got in touch recently. Here’s why: He found a mutual fund that looks good. “The fund has an excellent manager and good returns, but the management expense ratio of 2.48 per cent looks high,” he wrote. “Is it worth it?” Rob Carrick responds.

Insurance stocks are surviving big natural disasters. Here’s why

Insurers are facing horrendous losses related to this week’s catastrophic flooding in British Columbia, just months after the province suffered devastating fires, highlighting the rising financial risks related to climate change. Investors so far appear to have faith in the insurance sector’s resilience, but will it last? David Berman has some answers.

Soaring U.S. stocks make case for diversifying

Buy low, sell high. That’s what they tell you when you are starting out as a wet-behind-the-ears investor, and it has been sound advice over the very long haul. But over the past couple of decades? Not so much. For much of that period, the people who did best were those who insisted on buying high. The biggest beneficiary of this love affair with pricey investments has been U.S. stocks. They have been strikingly more expensive than their international counterparts for more than a decade. Yet rather than losing ground to their cheaper rivals, they have clambered higher and higher, becoming more highly valued against underlying earnings with the passing years. Should investors stick with the U.S. stock market, or is it time to look further abroad? Ian McGugan shares his thoughts.

Powell’s reappointment gives investors stability

Biden’s pick of Jerome Powell to continue as Federal Reserve Chair gives global investors stability and some predictability as the central bank prepares to taper its asset purchases and start hiking rates. Here’s a look at how market players are reacting.

COVID comeback threatens fresh setback for European market bulls

COVID-19 lockdowns have returned anew to haunt Europe’s economic prospects, forcing investors to reassess portfolios and sell vulnerable assets such as the euro and bank stocks.

Others (for subscribers)

The most oversold and overbought stocks on the TSX

Monday’s analyst upgrades and downgrades

Monday’s Insider Report: A $7.8-million investment in a stock that has more than doubled in 2021

Globe Advisor

Major sector ETFs face risk of large tech companies being reclassified

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What’s up in the days ahead

Larry MacDonald looks at how clients of certain online brokers can generate revenue from short sellers.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff

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