James Montier Resource Page

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“We need to stop pretending that we can divine the future, and instead concentrate on understanding the present, and preparing for the unknown...Frankly the three blind mice have more credibility than any macroforecaster at seeing what is coming.” -- James Montier

James Montier: Background & bioJames Montier

James Montier is currently a member of GMO’s European asset allocation team*. Prior to joining GMO in 2009, he was co-head of Global Strategy at Société Générale. James Montier is the author of several books that have become staples for any investor. These books include:

Mr. Montier is a visiting fellow at the University of Durham and a fellow of the Royal Society of Arts. He holds a B.A. in Economics from Portsmouth University and an M.Sc. in Economics from Warwick University.

Although, James Montier does not have his own fund, he has valuable information. Although some people might find psychology boring, James Montier’s The Little Book of Behavioral Investing is one of the most valuable books out there. At the Value Investing Congress in 2010, copies of the book were handed out to all participants.

*GMO , founded in 1977, is a privately held global investment management firm servicing clients in the corporate, public, endowment, and foundation marketplaces. As of  September 30, 2014, the group managed $120 billion in client assets using a blend of traditional judgments with innovative quantitative methods to find undervalued securities and markets.

James Montier: Investment insights

Unlike other famous investors, James Montier has not set out a specific investment strategy. However, he has provided a wealth of invaluable investment insights over the years. These materials are essential reading for investors.

James also ran his own blog, although he stopped posting when he moved to GMO. That said, the blog, entitled Behavioral Investing is still a great resource.

Some of James Montier’s recent investment insights:

Below is a detailed list of insights dating back to 2008 from 2010.

2010

July 7, 2010 blogger Adib Motiwala posted this good summary Lessons from “The Little Book of Behavioral Investing” by James Montier.

In this May 2010 article called I Want to Break Free, or, Strategic Asset Allocation does not equal Static Asset Allocation James Montier talks about in the beginning investing was a simpler and happier.

The essence of investment was to seek out value; to buy what was cheap with a margin of safety. Investors could move up and down the capital structure (from bonds to equities) as they saw fit. If nothing fit the criteria for investing, then cash was the default option.

But that changed with the rise of modern portfolio theory and, not coincidentally, the rise of “professional investment managers” and consultants.

An excerpt:

As Ogden Nash observed, “Progress might have been alright once, but it has gone on too long.” In my view, we need to return to a simpler, but more holistic, approach to investing. Clients should liaise with their managers to set a “realistic” real return target (recognizing that available returns are a function of the opportunity set, not a function of the needs of the fund). After all, the aim of investing must surely be “maximum real returns after tax” as Sir John Templeton observed long ago...Having defined the target, managers should be given as much discretion as possible to deliver that real return. This avoids the benchmark-hugging behavior that is typically induced by policy portfolios. Of course, it creates problems for measurement. Indeed, as I mentioned at the beginning of this paper, the most common response when I present these arguments is, “So, how should we measure you?”

This obsession with performance measurement at the expense of investment sense is disturbing to me. There is no easy mark to judge fund managers against. This may actually be a good thing. It may force investors to allocate capital on the basis of process: i.e., you will only let managers that you trust and understand run your money...

Thus, an approach that combines a more sensible view of risk and a concern for valuation makes considerably more sense to me.

Risk clearly isn’t a number. It is a multifaceted concept, and it would be foolhardy to try to reduce it to a single figure, not that that hasn’t stopped risk managers from doing exactly that. To my mind, the permanent impairment of capital can come about for three reasons:

1) valuation risk – you pay too much for an asset;

2) business risk – there are fundamental problems with the asset you are buying;

3) financing risk – leverage.

Note that this definition of risk puts valuation at its core, making value investing a truly risk-averse approach. Thus, taking a value-orientated view across asset classes and altering the exposure based upon valuation would seem to make a great deal of sense. Of course, active asset allocation is most frequently thought of as “market timing,” a term that tends to send investors running for the hills.

Indeed, as it is often practiced (based on forecasts of the short-term fluctuations in markets), I would concur that market timing is a highly dangerous pursuit as it ignores the principle of a margin of safety. The general dislike of market timing can be summed up by Graham and Dodd’s statement, “It is our view that stock market timing cannot be done...” However, less well-known is the fact that he continues this sentence, “with general success, unless the time to buy is related to an attractive price level, as measured by analytical standards. Similarly, the investor must take his cue to sell primarily not from so-called technical market signals but from an advance in the price level beyond a point justified by objective standards of value.”...Of course, in order to pursue a value-driven approach, patience and a willingness to be contrarian are required. Patience is needed for several reasons, the most pertinent of which is that valuations are only mean-reverting over relatively long periods of time. For instance, using the Graham and Dodd P/E measures, once a market is one standard deviation away from its long-run average, it takes, on average, 6 to 7 years for the series to cross the mean again.

In this February 2010 article, the first since joining GMO, James Montier asks Was It All Just A Bad Dream? Or, Ten Lessons Not Learnt from the financial crisis.

A short summary excerpt:

It appears as if the market declines of 2008 and early 2009 are being treated as nothing more than a bad dream, as if the investment industry has gone right back to business as usual. This extreme brevity of financial memory is breathtaking. Surely, we should attempt to look back and learn something from the mistakes that gave rise to the worst period in markets since the Great Depression. In an effort to engage in exactly this kind of learning experience, I have put together my list of the top ten lessons we seem to have failed to learn. So let’s dive in!

Lesson 1: Markets aren’t efficient.

As I have observed previously, the Efficient Market Hypothesis (EMH) is the financial equivalent of Monty Python’s Dead Parrot.1 No matter how many times you point out that it is dead, believers insist it is just resting...

Lesson 2: Relative performance is a dangerous game.

...leads directly to the separation of alpha and beta, upon which investors seem to spend an inordinate amount of time. Sadly, these concepts are nothing more than a distraction from the true aim of investment, which as the late, great Sir John Templeton observed is, “Maximum total real returns after tax.”...Of course, this begs the question: why are fund managers so wedded to relative performance? The simple, although unpopular, answer is that clients and consultants force them to be…

Lesson 3: The time is never different.

“Bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong. While bubbles that burst are scarcely benign, the consequences need not be catastrophic for the economy.” (Alan Greenspan, June 17, 1999)...

Lesson 4: Valuation matters.

At its simplest, value investing tells us to buy when assets are cheap and to avoid purchasing expensive assets. This simple statement seems so self-evident that it is hardly worth saying. Yet repeatedly I’ve come across investors willing to undergo mental contortions to avoid the valuation reality...

Lesson 5: Wait for the fat pitch.

...As tempting as it may be to be a “man of action,” it often makes more sense to act only at extremes. But the discipline required to “do nothing” for long periods of time is not often seen. As noted above, overt myopia also contributes to our inability to sit back, trying to understand the overall investment backdrop.

Lesson 6: Sentiment matters.

Investor returns are not only affected by valuation. Sentiment also plays a part. It is a cliché that markets are driven by fear and greed, but it is also disturbingly close to the truth. Sentiment swings like a pendulum, from irrational exuberance to the depths of despair...

Lesson 7: Leverage can’t make a bad investment good, but it can make a good investment bad!

Lesson 8: Over-quantification hides real risk.

Lesson 9: Macro matters.

Lesson 10: Look for sources of cheap insurance.

2009

In November 2009 article titled Only White Swans on the Road to Revulsion James Montier makes the argument that that the housing bubble and the crisis following its collapse was not an unforeseen event but rather the result of over optimism and the illusion of control, two classic human behavioural mistakes.

This article is the text of a speech called Six Impossible Things Before Breakfast, or how EMH has damaged our industry which James Montier delivered at the at the August 2009 CFA UK conference on “What ever happened to EMH”. Dedicated to Peter Bernstein (EMH = Efficient Market Hypothesis)

The financial times in this 24 June 2009 article EMH, AMH: Edwards and Montier ride again motions James Montier leaving Societe Generale to join US investment manager Grantham Mayo Van Otterloo & Co, just after he and Albert Edwards won the Thomson Extel European analysts award in May 2009 as the top global strategy team.

In this 2 June 2009 research paper Forever blowing bubbles: moral hazard and melt-up James Montier explored the bubble phenomenon and what happens in the future after a bubble pops. He explores the possibility that all the government rescue packages initiated in 2008 have the possibility to again inflate a substantial bubble.

In this 24 June 2009 Financial Times article called Insight: Efficient markets theory is dead. James Montier explains why the efficient markets theory is dead but still lives because of academic inertia.

In June 2009 James Montier’s published this list of his Favorite Investment Books as well as a Summer reading list of more recent titles.

In May 2009 shortly after the market started its recovery from its March 9 2009 lows James Montier in this article titled Sucker’s rally or the birth of a bull? asks if this is a suckers rally and if so what investors could do to protect themselves. He also gives a few short ideas from his shorting screen.

In this 27 January 2009 article Clear and present danger: the trinity of risk, James Montier writes about the three primary and interrelated sources of investment risk; Valuation risk, business or earnings risk and balance sheet or financial risk.

2008

In this excellent review of James Montier’s book – Behavioral Investing: A Practitioner’s Guide to Applying Behavioral Finance, Bruce Grantier summarises the main points of the book with emphasis on mistakes and biases followed by a discussion of number of behavioral phenomena.

In the article The psychology of bear markets published in December 2009, during the brunt of the bear market James Montier writes about that the mental barriers to effective decision-making in bear markets are as many and varied as those that plague rationality during bull markets but that they more pronounced as fear and shock limits logical analysis.

In this 25 November 2008 Bloomberg article Montier Has ‘Never Been More Bullish’ on Stocks James Montier makes the cast that stocks are “distinctly cheap” because they trade at 15.4 times the 10-year moving average of its companies’ profits, compared with an average of 18 for the U.S. market since 1881.James wrote that fifteen stocks in the U.S. index, pass his test for “deep value,” while a tenth of shares in Europe and a fifth in Asia qualify.

In this 27 October 2008 article – An admission of ignorance: a humble approach to investing James Montier details his investment strategy.

It makes no sense to forecast, the importance of a margin of safety, avoid trying to time the market and buy cheap insurance. But most importantly, humility should be the central theme of a good investment process.

In this October 22nd, 2008 Financial Times blog post by Paul Murphy summarises an article Analysts are rubbish by James Montier about the bullish bias built in to the investment industry by the analysts and that analysts are exceptionally good at one thing and one thing only – telling you what has just happened.

In this 9 September 2008 article – The dangers of DCF James Montier writes about the  dangers Of Discount cash flow (DCF) saying its implementation is riddled with problems but the good news is that several alternatives exist.

In this  23 June 2008 article – You are still wasting your time, or, are analysts just overpaid secretaries? James Montier writes about the whether company visits are useful for fund managers. The answer in general is no but they can be improved by learning to look for evidence that disagrees with us, and seek to disprove our ideas, rather than illustrate them with supportive evidence.

In this article The Road To Revulsion 16 June 2008 James Montier writes about bubbles, that bubbles are a by-product of human behaviour, and that human behaviour is sadly all too predictable.

The details of each bubble are different but the general patterns remain very similar. He also touches on the propensity for commentators to continually proclaim the end of the problem and a resumption of business as usual.

In the 30 May 2008 article Inflation Not The Problem Albert Edwards and James Montier explain why they are sceptical of all the market commentators saying that the worse market decline of the recession was over. How right they were, but it’s the way they arrived at their conclusion that makes the article worthwhile reading.

If you have any interest at all in short selling this is an article for you. On 26 May 2008, with the markets particularly overvalued James Montier turned his thinking to short selling writing Joining The Dark Side: Pirates, Spies and Short Sellers.

In the article he explains a simple short screen with surprising results shown through back testing in the USA and Europe.

In the article with the catchy title Asleep at the wheel, or, How I learned to stop worrying and love the bomb published on 7 April 2008 James Montier points out that company management and analysts are unwilling to revise their profit estimates in spite of the looming recession as everyone thinks their business is recession resistant. He points out that this is why they are all overoptimistic and how you can avoid falling into the same trap.

In this 13 March 2008 research article called Remember, Cassandra was right!James Montier makes a strong argument that the mess in the US economy and housing market was not caused by a black swan event (unpredictable) but rather was sadly predictable.

It follows the standard pattern of a bubble deflating, some thing that we have seen a thousand times before.

On 12 January 2008 James made the last post on his blog called Behavioural Investing – The application of psychology to finance and the home of an investing sceptic.

The articles he wrote all still there and it’s a real treasure trove of information.

In this 15 January 2008 article The Dash To Trash And The Grab For Growth James Montier wrote just shortly after the absolute peak in the 2008 bull market he suggests that if you cannot move to cash because of career risk then invest in large dividend paying companies as what is going to happen to growth stocks at already high valuations is not going to be pretty. How right he was.

2002

In 22 November 2002 James Montier wrote in Part man, part monkey that leaving the trees could have been our first mistake. Our minds are suited for solving problems related to our survival, rather than being optimised for investment decisions. We all make mistakes when we make decisions. The list below gives a top ten list for avoiding the most common investment mental pitfalls.

  1. You know less than you think you do
  2. Be less certain in your views, aim for timid forecasts and bold choices
  3. Don’t get hung up on one technique, tool, approach or view flexibility and pragmatism are the order of the day
  4. Listen to those who don’t agree with you
  5. You didn’t know it all along, you just think you did
  6. Forget relative valuation, forget market price, work out what the stock is worth (use reverse DCFs)
  7. Don’t take information at face value, think carefully about how it was presented to you
  8. Don’t confuse good firms with good investments, or good earnings growth with good returns
  9. Vivid, easy to recall events are less likely than you think they are, subtle causes are underestimated
  10. Sell your losers and ride your winners

James Montier: Articles

 

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