Pattern Recognition and Public Markets
Michael Mauboussin, Head of Consilient Research at Counterpoint Global, joined host Ted Seides to discuss Michael’s recent Consilient Observer article on pattern recognition, including when it works and when it doesn’t. They then transition to discussing the changing nature of public markets, inspired by another of Michael’s recent research reports, Birth, Death, and Wealth Creation. They examine which companies have had the largest stock market capitalizations and how that population has changed.

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Read the full Consilient Observer articles discussed in the episode:

Pattern Recognition: Opportunities and Limits
We explore the powers and perils of pattern recognition, which investors often cite as a basis for action. While it can be powerful when applied properly, it can also be misleading and lead to overconfidence. We define pattern recognition, discuss when it works better, review why it may mislead, and offer ways to improve it. Pattern recognition tends to work well in stable environments where cause and effect are clear and feedback is effective but poorly where causality and feedback are limited.

Birth, Death, and Wealth Creation
We examine the demographics of public companies and their patterns of wealth creation. We focus on the last half century in the U.S. and review the “births” and “deaths” of public companies. We also discuss changes in market composition. Nearly 60 percent of companies have failed to create value, and 2 percent have created 90 percent of the aggregate wealth. This suggests two strategies for portfolio construction: seek broad diversification or aim to own the massive wealth creators.