Young, British and iconoclastic, James Montier is worth watching.
James Montier has built quite a reputation for himself in the investment world, and still being the right side of 40, his best years may be yet to come.
Career to date
Montier earned a bachelor's degree in economics from the University of Portsmouth, followed by a master's degree, also in economics, from the University of Warwick.
He initially joined Dresdner Kleinwort in 1992, staying with them for five years. After shorter spells at NatWest Markets and Old Mutual, he returned to Dresdner in 2000 as Global Equity Strategist, moving to Société Générale in 2007. In June of this year he left SocGen to join Boston-based asset manager GMO, which has $89bn under management.
Montier is firmly in the value investing school, but somewhat like Charlie Munger, he blends this with a very keen appreciation of the role of psychology on the markets. His first two books, Behavioural Finance (2002), and Behavioural Investing (2007), are about the integration of these two disciplines.
As a behavioural investor, he pours scorn on the efficient market hypothesis (EMH) and capital asset pricing model (CAPM). His data shows that "over a wide range of measures value appears to be no riskier (and often less risky) than growth", attacking the EMH idea that value returns are a reward for taking bigger risks.
And unlike many value investors, he does not simply take the bottom-up approach of looking at the standard ratios and finding what looks 'cheap'; his analysis is also top-down, considering cycles of the economy, of credit availability, of sentiment, and so on. Value, in terms of the balance sheet as well as profit, is still the key, but the thresholds for identifying buys and sells will shift depending on one's assessment of the cycles. Appearing cheap relative to its peers is not good enough.
This focus on cycles might seem at odds with Montier's aversion to forecasting -- situating ourselves at a particular point in the cycle does assume that we know what's coming next, at least in general terms. As Montier is keen to point out, "analysts lag reality. They only change their minds when there is irrefutable proof they were wrong, and then only change their minds very slowly."
"In general, forecasts seem to be a lagged function of actual outcomes." Or to put it another way, forecasts are useless. Not a popular opinion in an industry built on making predictions.
Montier is not content to just point out where we're wrong, though, but also drills into the reasons why we are wrong. This is where all that behavioural stuff comes in. Many of the errors in forecasting, for example, are the result of our tendency to anchor on irrelevant information.
What he terms 'evidence-based investing' requires us to be sceptical and to question everything, especially ourselves and our thought processes. "To make better decisions, we need to think more about thinking." We don't have in information deficit, but a thinking deficit.
The tendency for fund managers to benchmark themselves against an index can lead them to a default position of owning the index, and needing to be convinced of reasons not to own a particular share, rather than needing to be convinced of the case for ownership. 'Homo Ovinus', the sheep-like human, is obsessed with his performance relative to the rest of the flock, rather than in absolute terms.
These topics were discussed, and the evidence chewed over, in his monthly 'Global Equity Strategy' reports while at DKW, and 'Mind Matters' at SocGen. His missives are not just limited to squeezing more return from investments, however, but also to the point of it all, the importance or otherwise of money.
He famously wrote about the elements of happiness, and about how it is not predicated on wealth. At the same time, wealth can be used to buy experiences and personal growth, which he sees as far more rewarding than another Ferrari.
Track record and current views
His top-down analysis has led him to the bear camp, regarding the markets as overvalued long before the market came to that conclusion. And it was a lonely road: "Nobody likes a bear. As a career move, bearishness is not a great idea; in a bull market, nobody listens; and in a bear market, nobody will pay you."
And in time he was right about this, and right to predict the collapse of commodity prices by the end of 2008. But around that time he began to regard the fall in share prices as excessive, and switched to the bull camp. As recently as a month ago, he was quoted in the Financial Times as maintaining that position: "From my perspective, it is very simple -- you buy when the market is cheap and the UK and European markets fall into that definition right now."
If he decides to stay in the industry, then he could have several more decades to refine his thinking, and I believe it will be very interesting to see how that develops.
Books by James Montier:
More: Are You Smarter Than Other Investors?
More investing greats:
John Bogle | George Soros | Ben Graham | Jim Rogers | Warren Buffett | Anthony Bolton | Jesse Livermore | Jim Slater | Charlie Munger | Peter Lynch | Carl Icahn | Philip Fisher | Ken Fisher | John Neff | John Templeton | Mark Mobius | Neil Woodford | T. Rowe Price | Bill Miller | Robin Geffen | David Dreman | Ian Rushbrook