This interview covers Michael Mauboussin's view that traditional metrics like profit margins can mislead because they ignore intangible investments (e.g., R&D, brand). He argues that high profits at firms like Google and Microsoft come from heavy intangible spending, not monopoly power. He notes that surging real interest rates have hurt asset prices but boosted expected returns, creating capital-allocation opportunities. Key holdings: Snowflake (its ROIC jumps from -416% to 3% after adjusting for intangibles, fitting an early-stage firm), Amazon (overcapacity post-COVID, management adjusting), and OpenAI (AI performance surprises, but value capture is unclear).
Michael Mauboussin (Head of Research at Counterpoint Global) delved into three core topics during the program: market share, return on invested capital (ROIC), and capital allocation. He pointed out that early-stage breakthrough companies in low-concentration markets present attractive investment op
Michael Mauboussin (Head of Research at Counterpoint Global) and Patrick O'Shaughnessy engaged in an in-depth discussion on three core topics: market concentration, return on invested capital (ROIC), and capital allocation. The central thesis is that these seemingly basic metrics, when adjusted for intangible assets, reveal a completely different picture—the high profit margins of "superstar firms" stem not from market monopoly, but from their heavy investment in intangible assets.
Mauboussin argues that there is no stable causal relationship between market concentration and industry profitability. Citing academic literature, he notes that highly concentrated industries are not necessarily more profitable than those with low concentration; rather, there is a weaker conditional link between a company's market share and its profitability.
Mauboussin argues that traditional ROIC calculations severely underestimate the true capital investment of technology companies. After capitalizing intangible assets, extreme values are pulled back into a reasonable range. Meanwhile, the sharp rise in markup since 1980 nearly disappears once intangible investment is accounted for.
Mauboussin finds that the largest source of capital for U.S. corporations is internal cash flow, the largest use is M&A, but intangible investment (R&D and certain expenses within SG&A) has surpassed capital expenditure to become the second-largest spending item. Common traits of superior capital allocators include "zero-based thinking" and a "willingness to act."
Mauboussin argues that over the past 12 months, real rates have risen from -100bp to +120bp (a shift of over 200bp), putting pressure on all asset classes while simultaneously creating mispriced capital allocation opportunities. Artificial intelligence is the most noteworthy disruptive innovation at present.
| Position | Analyst View | Key Data |
|---|---|---|
| Historical case (winner-takes-all in search market) | Search market share rose from extremely low in the late 1990s to 85-90% | |
| Microsoft | Historical case (dominance in word processing market) | Traditional ROIC 49%, adjusted for intangible assets down to 34% |
| Snowflake | Early-stage company case | Traditional ROIC -416%, adjusted for intangible assets 3% |
| Walmart | Positive value stick case | Data sharing with P&G reduced supplier willingness to sell |
| Procter & Gamble | Positive value stick case | Leveraged Walmart data to optimize production and reduce inventory |
| Amazon | Capital allocation case | Heavy investment in capacity during COVID, followed by demand reversal |
| OpenAI | Current focus | GPT-2 → GPT-3 performance improvement exceeded expectations |
1. "There is no stable causal relationship between market concentration and profitability" (Mauboussin) — Highly concentrated industries are not necessarily more profitable; only company-level market share and profitability have a conditional correlation. Investors should focus on market share stability and entry/exit data, rather than simply looking at concentration.
2. "Don't worry about raising prices; think about how to increase willingness to pay" (Mauboussin, citing Oberholzer-Gee) — The core of the value stick framework: raise the maximum price consumers are willing to pay, rather than directly increasing prices. Network effects and complementary goods (e.g., charging stations for electric vehicles) are classic paths to boosting willingness to pay.
3. "So-called superstar companies are essentially those with the largest investments in intangible assets" (Mauboussin) — The surge in markups after 1980 almost disappears once intangible investments are accounted for. High-markup firms are precisely those that spend the most on SG&A and R&D, not monopolistic price-setters.
4. "Snowflake's ROIC went from -416% to 3% — fully consistent with early-stage company characteristics" (Mauboussin) — Capitalizing intangible assets brings extreme values back to a reasonable range, revealing the true economic picture. Traditional accounting severely underestimates the capital investment of technology companies.
5. "98% of companies operate below the optimal resource adjustment level" (Mauboussin, citing academic research) — Corporate capital allocation exhibits enormous inertia. Asking "how much resources does this business need" from scratch each year is a core habit of excellent capital allocators.
6. "Dividends are seen as sacred, buybacks as residual" (Mauboussin, citing a survey by John Graham) — Although theoretically equivalent, CFOs have vastly different mental accounts for the two. Dividends cannot be cut, while buybacks are only done when there is spare cash.
7. "No asset class can escape a shift in real interest rates from -100bp to +120bp" (Mauboussin) — The over 200bp swing in real rates over the past 12 months has pressured all assets, but expected returns have risen significantly, creating mispricing opportunities for capital allocation.
8. "AI performance improvements have exceeded expectations, but who ultimately creates and captures value remains unclear" (Mauboussin) — The leap from GPT-2 to GPT-3 was astonishing, but two key questions remain unresolved: the impact on employment (history suggests it may not lead to job losses), and the attribution of value (which is not clear from the outset).