James montier value investing definition

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Unfortunately this book was not as interesting as his later book Bull's Eye Investing which provides a topical look at the current high level of the stock market and what strategies could work in the coming years - a more difficult topic in my opinion but A reasonable defense of value investing in general terms but disappointingly shallow, highly repetitive and weak on individual stock selection perhaps because the author does not himself invest in individual stocks "given time constraints".

Unfortunately this book was not as interesting as his later book Bull's Eye Investing which provides a topical look at the current high level of the stock market and what strategies could work in the coming years - a more difficult topic in my opinion but better handled closer to his expertise as an economic forecaster I suspect. A great quote from the book comes from Third Avenue Management who said "DCF is like the Hubble telescope, if you move it an inch you end up studying a different galaxy".

There were hundreds of similar quotes from Templeton to Buffet to Newton who failed as an investor incidentally. While the quotes were interesting they were not well integrated into the text and came off as somewhat gratuitous. Unfortunately, the supposed backbone of the book, "Value Investing: Tools and Techniques" is where the book really fails - it just isn't a blueprint for making successful value investments in the way Graham's Intelligent Investor is.

That said, readers less familiar with value investing may appreciate the simplified approach and general advice. My advice: rather purchase the equivalent works of Greenwald, Dremen, Klarman or Graham and if you are interested in Montier, read his other book "Bulls-eye Investing". He argues that value investing is the only approach that puts risk management at the heart of portfolio construction.

The book can be divided into two themes: assessing valuation and risk, and the importance of investor behavior in determining outcomes. On the latter, Montier has also written the well-regarded Little Book of Behavioral I James Montier's book, Value Investing, provides a broad review of successful value-oriented investment methods plus a few common offsetting behavioral pitfalls.

According to Montier, the real aim of asset management was best expressed by Sir John Franklin Templeton: "to maximize real total returns after tax". Any activity that doesn't contribute to that goal is a distraction. A common distraction Montier strongly opposes is the capital asset pricing model CAPM , which he calls "insidious". His philosophy is very practical and data-driven, and while CAPM provides enticing formulas that have theoretical appeal, the framework simply hasn't been predictive.

Montier cites a study by Jeremy Grantham a great investor and colleague of his at GMO demonstrating that low beta stocks have outperformed high beta for decades, exactly counter to the premise of CAPM. In terms of the mechanics, these things can be as simple or as complex as you like. I tend to use a three stage model. I use the analyst inputs for the first three years, a trend GDP related growth rate for the terminal years, and then infer what the market implies for the middle period of growth.

That is a cyclical sector with an implied growth rate double a generous estimate of nominal GDP growth. Cyclicals masquerading as growth stocks rarely end well for investors. Why do investors overpay for beauty and underpay for toads…after all they are one step away from becoming princes, are they not? This heuristic complements the Anginer, et all study where ugly defendants are more likely to be found guilty and receive longer sentences than attractive defendants. James Montier: We humans have a bizarre bias against a bargain.

For instance, my friend Dan Airely has done some great experiments in this field showing some pretty odd findings. The only snag is that the two wines are exactly the same. The same thing happens with pain killers. It is why branded pain killers exist alongside generic equivalents. They both have exactly the same active ingredient, but people report the branded version works better.

I suspect that something similar happens with stocks. The Anginer et al study shows some similar findings in the legal context. Ugly defendants get far worse sentences than attractive defendants. We have a hard time believing that attractive people could have been bad — a kind of halo effect, if you will. Tell us about the Trinity of Risk. Which of the three components do you think is the hardest to monitor, why?

First, there is valuation risk — you can simply overpay for an asset. Second, there is fundamental or business risk — something goes wrong with the underlying economics of the asset. I think you to consider all three aspects in order to gain a holistic view. Miguel: Why are we so terrible at predicting our emotions? James Montier: I wish I knew. However, all the evidence shows that we are truly appalling at predicting how we will act in the heat of the moment.

However, when that lower price arrives, we are caught like rabbits in the headlights. Learning to master your emotions is one of the most valuable things that investors can learn to do. What a wise statement; tell us more. James Montier: Regrettably, knowledge and behaviour are not the same thing.

Now I know this, and I know that the easiest way for me to remedy this situation is for me to eat less. The same is true when it comes to investing. We need to force ourselves to actually change our behaviour by altering the way we approach investing. Tell us how you look at cycles. Are there any indicators or measurements you rely on? The Philly Fed have a good by which I mean timely index called the ADS measure which tracks where we are in real time. Miguel: 2. You praise skepticism…How do you balance skepticism with a perma bear bias?

James Montier: To me skepticism means questioning what I hear. That tends to lead to a contrarian perspective. When everything I hear is bullish skepticism, that leads me to be bearish, and when everything I hear is bearish, skepticism pushes me to be bullish. Miguel: 3. History matters: Name 3 of your favorite financial history books. If I were allowed a fourth it would be J. Studying these four books would do most investors a much greater service than studying for a CFA.

Miguel: 4. I also find your Paul Wilmot and Emanuel Derman quotes quite interesting. James Montier: My work in this field was sparked by listening to gold medal winners being interviewed at the Olympics a few years back. Invariably the interviewer would ask them what was going through their minds before the race started, where they focused on the gold? The response always came back that they were always focused on what they had to do i.

Process is the one aspect of investing that we can control. Yet all too often we focus on outcomes rather than process. Yet ironically, the best way of getting good outcomes is to follow a sound process. What do these findings imply about investment behavior?

James Montier: Bob Kirby was an investment great. His writings on investing are right up there with the best, yet he remains a name that is relatively unknown. One of his papers was on the subject of the coffee can portfolio. He harked back to the days of the old west, when people would keep their most prized possessions in a coffee can under the bed. Kirby argued that investors should behave in a similar fashion, and create a portfolio of stocks that they would be happy to hold in a can and forget about he called this passively active as opposed to actively passive.

It appears as if investors have a chronic case of attention deficit hyperactivity disorder. The average holding period for a stock on the New York Stock Exchange is just 6 months! This has nothing to do with investment, and everything to do with speculation. Having a longer time horizon than these speculators appears to be one of the most enduring edges an investor can possess. If everyone else is jumping around only concerned with the next two quarters of earning announcements, then they are likely to end up mispricing assets for the long-term.

I set it up and have been running it for over a decade now. The criteria are simple as is all good investing. I added one extra criterion, a Graham and Dodd PE current price over a 10 year moving average of earnings of less than 16x times. The bottoms up benefits are obvious; it can provide us with a list of stocks which make sense as a starting point for a portfolio.