Wednesday, September 24, 2014

Force Feeding Assets: Grantham Mayo's James Montier on Foie Gras Markets and Other Observations

From the CFA Institute:

Hideous Opportunity Sets and Foie Gras Markets: Observations from James Montier
James Montier, currently a member of GMO’s asset allocation team, is a value investor who uses behavioral finance insights to guide his investment strategy. His observations on financial markets — including the “Seven Immutable Laws of Investing” that he has applied to analyze markets around the world — combine vivid imagery with blunt commentary on investor behavior. The current investment environment has given him a lot to talk about:

Foie Gras Markets: In a January interview with Robert Huebscher, Montier described the challenges of building a portfolio in an environment where bond returns are unattractive and cash is generating negative returns. Montier said that the challenge lies in finding investments that offer a margin of safety when investors are “stuck in this kind of foie gras market where you’re being force-fed risk assets” by central banks.

Reverse Decoupling Theory: In a March discussion with Mark Dittli, CFA, and Gregor Mast, Montier said that in the past, the decoupling theory has led investors to expect emerging markets to be unaffected by economic slumps in developed markets. Montier now observes investors embracing a “reverse decoupling theory” — that is, the theory that developed markets will resist emerging market downturns. “Neither of these assumptions is true,” Montier said. “I don’t think decoupling can happen in either direction.”

Overrated Bubble Hunting: In his Huebscher interview, Montier noted that investors don’t need to believe in equity market bubbles to realize that they’ll get low returns from assets that are overpriced. Montier acknowledged that “the use of bubble methodology is certainly not to be underestimated,” but he also warned that “people use the term too loosely and it can lead to unhelpful assessments.”