Excess Returns Podcast Summary

Episode: The Most Powerful Investing Tool You Aren’t Using | Four Lessons from Michael Mauboussin

Date: November 9, 2025
Hosts: Jack Forehand, Matt Zeigler
Featured Guest (via archival audio & discussion): Michael Mauboussin

Episode Overview

In this special episode, Jack Forehand and Matt Zeigler—co-hosts of Excess Returns—kick off a new book project by revisiting their favorite concluding interview question: “Based on your experience in markets, what is the one lesson you would teach the average investor?” The episode acts as both a podcast and a live draft chapter, focusing on seminal ideas from legendary investor-thinker Michael Mauboussin.

The main theme is the discussion of four key investing lessons from Mauboussin, emphasizing the underappreciated power of “base rates” and extending to concepts like expectations investing, proper use of multiples, and the paradox of skill—all essential for thoughtful, long-term investing.

Key Discussion Points and Insights

1. The Book-in-Progress and Community Collaboration

• Hosts’ Plan: Jack and Matt are turning their podcast’s collection of great closing answers into a book, writing it openly and iteratively via their Substack (excessreturnspod.substack.com).
• Engagement Invitation: They actively request feedback from listeners/readers to refine ideas and address confusion before the book is completed.

2. Michael Mauboussin’s Four Essential Investing Lessons

Lesson 1: The Power (and Underuse) of Base Rates

[04:57–09:28]

• Definition & Application:
  • Mauboussin: “I would encourage people to learn about and apply base rates as they think about the world of investing. ... It’s a very unnatural way to think because you have to leave aside your own information gathering and find an appeal to the base rate, which may not be at your fingertips ... but once you do, I think it reshapes how you think a lot about the world...” [04:57]
  • Base rates involve seeing your investment or decision as one of a larger group (“reference class”), asking what happened to others in similar situations, and grounding forecasts in actual historical outcomes rather than just personal analysis.
• Practical Example:
  • Instead of just analyzing a rapidly growing company’s unique story, ask: How have all other companies with similar growth rates performed over time?
• Key Insight:
  • Base rates are widely underused despite their power.
• Memorable Moment:
  • Mauboussin (on forecasting): “You sort of made the joke 10% with some standard deviation. But that's actually the right way to think about it.” [06:22]
• Hosts’ Take:
  • Jack: “This idea kind of flipped a lot of things for me... it inverts the way most of us analyze situations.”
  • Matt: “It’s a crazy hack that has applications well across finance, if not across life.” [07:14–08:10]
• Key Clarification:
  • Base rates don’t eliminate room for nuance or special situations—sometimes exceptions (“Mag 7” tech growth) arise—but they ground expectations in reality.

Lesson 2: Expectations Investing – Reverse-Engineering the Stock Price

[10:42–16:41]

• The Three-Step Process:
  1. Start with Price: Reverse engineer what the market’s current price implies (down to growth rates, margins, capital needs).
  2. Historical & Strategic Analysis: Use history and fundamental analysis to gauge the probability that these implied expectations will be met, exceeded, or missed.
  3. Probabilistic Scenarios: Assign probabilities across a range of scenarios (not just one “answer”) to make informed buy, sell, or hold decisions.
• Quote:
  • Mauboussin: “The only thing we know for sure is the price … what has to happen for this current stock price to make sense?” [10:42]
  • “We argue that coming out of step two, what you should have is a number of scenarios … and you should attach probabilities to those. We’re really going to think about the world in expected value terms rather than, you know, ‘here's the answer.’” [12:05]
• Key Insight:
  • The approach is radically different from traditional valuation—for example, starting from market price and deducing expected performance, not projecting value outright.
• Hosts’ Anecdotes & Reflections:
  • Matt discusses his evolution in investment thinking after reading Mauboussin, emphasizing the shift to “probabilistic weighting” and scenario-based analysis.
  • Jack underscores how this method catches over- or underpriced expectations that traditional analysts might miss.
• Notable Moment:
  • Matt paraphrases Elroy Dimson: “Risk means more things can happen than will happen.” [14:22]
• Value Trap Example:
  • Value investing often seeks cases where expectations are ultra-low across many companies; wins occur if outcomes merely turn out “not totally terrible,” not necessarily “great.” [18:40–19:14]

Lesson 3: Multiples Are NOT Valuation

[19:37–26:25]

• The False Shortcut:
  • Mauboussin: “Multiples are not valuation. They are a shorthand for the valuation process, and one should never confuse those two things." [19:37]
  • Multiples (like P/E ratios) are useful for speed and conversation, but unless you understand what economic and growth assumptions are embedded within them, you risk fundamental misjudgments.
• Best Practice:
  • “You have to earn the rights to your multiples... demonstrate that you understand the underlying economic assumptions that are embedded.” [21:09]
• Growth Caveat:
  • Not all growth adds value. Growth only creates value if a company earns above its cost of capital; otherwise, it can amplify losses.
• Memorable Moment:
  • The “earn the right to use multiples” idea pops the ego of those who treat shortcuts as sufficient—they’re hints, not answers.
• Anecdote:
  • Jack and Matt swap stories about realizing, in both sports and investing, that there’s always a higher level of complexity underlying apparently simple shortcuts.

Lesson 4: The Paradox of Skill – When Everyone’s Good, Luck Matters More

[29:24–37:42]

• Baseball Analogy:
  • No MLB hitter has reached a .400 average since 1941—not because players are worse, but because as everyone gets better, their performances converge and luck starts playing a larger role in outcomes.
• Application to Investing:
  • Mauboussin: “Skill is not only high, but it’s uniform. ... It just defies logic that there’s no skill. There’s huge amounts of skill. That’s the problem.” [32:27]
  • “As the absolute level of skill rises, relative skill becomes less important and luck becomes more important.”
• Active Management Implications:
  • With only the best active managers left (after years of others exiting), outperforming is actually harder, not easier, despite the “fewer competitors” narrative.
• Hosts’ Reflections:
  • Matt: “It’s the losers game thing... when we get to two pros ... the outcome will be determined on luck because one of them’s gonna flub a shot ... and that's gonna be the unlucky reason they lose.”
  • Jack: “So this idea is as the absolute level of skill rises, relative skill becomes less important and luck becomes more important. ... It’s something that takes some thinking to wrap your arms around.” [32:35]

Key Quotes & Memorable Moments

• Base Rates:

  “If I could go back to my 20 year old self, that’s certainly what I would teach. ... It's remarkable how underutilized this concept is, notwithstanding its demonstrable power.”
  —Michael Mauboussin [06:30]

• Expectations Investing:

  “What has to happen, or what does one need to believe, for today's stock price to make sense?”
  —Michael Mauboussin [10:55]

• Multiples’ Caution:

  “Multiples are not valuation. Let me just stop there. ... The key is that you understand the economic implications of the multiples that you’re using.”
  —Michael Mauboussin [19:37]

• Paradox of Skill:

  “The skill is not only high, but it’s uniform. ... That skill gets reflected in prices. ... The degree to which [the market is] largely efficient ... means the random walk kind of thing comes into play.”
  —Michael Mauboussin [32:27]

• Humility in Investing:

  “Are we willing to start with base rates that might contradict our optimism?”
  —Jack Forehand [39:30]

Lightning Round: Challenging Yourself to Apply the Lessons

[38:21–44:27] Hosts encourage listeners/readers to ask reflective questions to solidify learning:

• Are you open to base rates contradicting your optimism?
• Are you identifying the correct “reference class” when analyzing situations?
• What are the “base rates” of your own judgment and forecasting track record?
• Are you journaling decisions to properly assess your process (inspired by Brent Donnelly/Tobias Carlisle)?
• How might you leverage new tools, like LLMs, for honest self-evaluation?

Matt:

“I started to make a little dump file of the existential dread and questions that come up... I just started to save them, because I was like, ‘Oh, well, maybe these will help other people.’” [38:52]

Additional Insights & Anecdotes

• On the Value of Shortcuts:
  • Shortcuts (multiples, heuristics, LLMs) save time, but can short-circuit understanding and growth if you don’t “earn” them with underlying mastery.
  • “Shortcuts are still essential. ... You just have to earn your way up to getting there so that they don’t turn around to bite you because otherwise they become bad habits.” —Matt Zeigler [26:11]
• On Tech and Tools:
  • There’s a running comparison to using LLMs or productivity hacks—tools are only as good as the user’s mastery and understanding of underlying processes.

Timestamps for Key Segments

• Base Rates Explained (Mauboussin): 04:57
• Practical Example – Growth Companies: 06:33
• How to Use the Outside View: 08:10
• Expectations Investing Framework (Mauboussin): 10:42
• Importance of Probabilities and Multiple Scenarios: 14:21
• Value vs. Growth Expectations: 18:09
• Multiples Are Not Valuation (Mauboussin): 19:37
• Hidden Growth/Value in Multiples: 21:09
• Shortcuts vs. Mastery: 26:11
• The Paradox of Skill (Mauboussin): 29:24
• Implications for Active Investing: 36:04
• Reflection Questions/Lightning Round: 38:21

Conclusion & Next Steps

Jack and Matt reiterate the importance of feedback on their draft chapters, invite readers to join and comment on Substack, and preview upcoming chapters featuring other top investor lessons (e.g., Liz Ann Sonders).

Final Host Reflection:

“This is the book we wanted on our shelves. We’re hoping this is the book you want on your shelves too ... Get in on the ground floor. Give us some advice.” —Matt Zeigler [46:49]

How to Engage

• Substack and Draft Feedback: excessreturnspod.substack.com
• Share Input or Guest Suggestions: Email or comment via Substack
• Podcast Archives and Content: Same Substack platform

Summary prepared to authentically reflect the tone, depth, and structure of the episode.