The Long View James Montier: 'How Do I Get Paid for Owning This Asset?'
Our guest on this week's installment of "The Long View" podcast is James Montier. Montier is a member of the asset-allocation team at Grantham, Mayo, Van Otterloo & Co. Before joining GMO in 2009, he was co-head of global strategy at Societe Generale. A prolific and incisive writer, Montier has authored several books, including Behavioural Investing: A Practitioner's Guide to Applying Behavioural Finance; Value Investing: Tools and Techniques for Intelligent Investment; and The Little Book of Behavioral Investing. He's also a regular contributor to GMO's library of white papers and research studies on topics ranging from productivity, strategic asset allocation, contrarianism, and more. In addition to his duties at GMO, Montier is also a visiting fellow at the University of Durham and a fellow of the Royal Society of Arts.
Background
Grantham, Mayo, Van Otterloo & Co.
Behavioural Investing: A Practitioner's Guide to Applying Behavioural Finance by James Montier
Value Investing: Tools and Techniques for Intelligent Investment by James Montier
The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy by James Montier
Montier's articles in GMO's research library
Montier's Role at GMO
"My role is essentially to be difficult, and it turns out I'm quite good at that." Montier describes his role at GMO and how his contributions to the firm are measured. (1:10-3:11)
Fostering Debate at GMO
"We have never had a house view." Why debate and constructive devil's advocacy is welcome at GMO. (3:12-4:31)
"Investing is one of those fields where there is almost constant evidence that we are all wrong." How to foster humility and a diversity of views. (4:32-7:38)
Debating Jeremy Grantham on mean reversion: Montier gives an example of an issue the team has debated recently--how long it takes for markets to revert to their long-term averages. (7:39-9:36)
- Jeremy Grantham bio
- "This Time Seems Very, Very Different" by Jeremy Grantham (GMO Quarterly Letter, 1Q 2017)
- "The S&P 500: Just Say No" by Matt Kadnar and James Montier (Aug. 15, 2017)
Forecasting and Portfolio Construction
How the debate over mean reversion informs GMO's asset-class forecasts. (9:37-10:09)
- GMO 7-Year Asset Class Forecast (May 2019)
Corporate concentration and low interest rates: How GMO is reconsidering these variables and their impact on the asset-class forecasts it makes. (10:10-11:38)
"The Idolatry of Interest Rates, Part II: Financial Heresy and Potential Utility in an ERP Framework" by James Montier and Ben Inker (Aug. 11, 2015)
How GMO incorporates its asset-class forecasts into the multi-asset strategies it manages. (11:39-12:37)
- GMO Benchmark-Free Allocation III GBMFX
The appeal of a "robust" forecast that's meant to help portfolios withstand various potential outcomes. (12:38-14:15)
"Our portfolios look a little freakish." Montier explains why GMO is U.S.-stock-phobic and, conversely, why the firm is finding value in alternatives. (14:16-18:04)
- GMO Benchmark-Free Allocation II Fund's asset allocation
- Sir John Templeton: "If you want to have a better performance than the crowd, you must do things differently from the crowd."
Career risk: Where individual investors hold an edge over institutions. (18:05-18:55)
- "Career Risk Is Likely to Always Dominate Investing" by Jeremy Grantham (Dec. 24, 2014, Finanz and Wirtschaft)
Alternatives
Montier defines "alternatives." Different ways of owning standard risks--depression risk, inflation risk, and liquidity. (18:56-21:49)
- "The General Theory of Employment, Interest, and Money" by John Maynard Keynes
Montier presents two examples of alternative strategies that GMO employs--merger arbitrage and put-selling--to own standard risks in different ways. (21:50-25:49)
- Merger-arbitrage definition
- Put-selling definition
- "Is This Purgatory, or Is It Hell?" by Ben Inker (GMO Quarterly Letter, 3Q 2014)
"We should size them such that they cannot hurt the overall fund should we get something wrong." How GMO sizes its positions in alternative strategies. (25:50-27:33)
Alpha, beta, and decay: How GMO assesses an alternative strategy's vulnerability to being arbitraged away. (27:34-29:57)
GMO's Bearish U.S. Equity Forecast
"How do I get paid for owning this asset?" Key inputs to GMO's U.S. equity forecast--multiple, margin, yield, and growth. (29:58-32:08)
- "Back to Basics: Six Questions to Consider Before Investing" by Ben Inker (Nov. 8, 2010)
"A behavioral self-defense mechanism." How GMO's approach to forecasting helps to structure its thinking and anchors decision-making. (32:09-34:54)
"It's really valuation where we've been most wrong." Where GMO's U.S. equity forecast erred in recent years. (34:55-36:01)
"We have to wear that. We have to own it." Montier on steps that GMO has taken to introspect on its forecasting error and how that expresses itself in the way it makes decisions and manages money. (36:02-39:45)
Planning Amid a Dearth of Value
"A reach for yield in any way, shape, or form." Explaining the dearth of value. (39:46-41:43)
- "The Deep Causes of Secular Stagnation and the Rise of Populism" by James Montier and Philip Pilkington (March 22, 2017)
"We have always been pretty bad at (forecasting), and it's unlikely we're going to get a lot better." (41:44-44:37)
How should investors and advisors forecast asset-class returns and plan for the future? (44:38-47:25)
- "Investing for Retirement: The Defined Contribution Challenge" by Ben Inker and Martin Tarlie (April 5, 2014)
Capital Allocation
Montier on the folly of firms borrowing to repurchase shares: "The more stable the environment, the easier it is to take on leverage, but the greater the danger that taking leverage creates further down the line when you get some random shock." (47:26-50:49)
- "The Late Cycle Lament: The Dual Economy, Minsky Moments, and Other Concerns" by James Montier (Dec. 17, 2018)
- "The Financial Instability Hypothesis" by Hyman P. Minsky (May 1992; The Jerome Levy Economics Institute of Bard College)