Roadmap To Inflation And Sources Of Cheap Insurance
March 24, 2009
What happens when inflation once again returns. As this week's Outside the Box writer, James Montier, writes, we may want to start thinking now about inflation insurance and he mentions a few ways to do so. But this letter is a must read for his bringing to light a speech by Fed chairman Ben Bernanke in 2000 given to the Japanese, where he suggest inflation targeting:
"In the speech, he laid out a menu of policy options that are available to the monetary authorities at the zero bound. First, aggressive currency depreciation, as per Romer's analysis of the end of the Great Depression. Second on Bernanke's list is the introduction of an inflation target to help mould the public's expectations about the central bank's desire for inflation. He mentions the range of 3-4%!"
I think you will find this week's OTB to be exceptionally thought provoking. Montier is one of my favorite economic thinkers (and a good friend). He works for Societe Generale in London in their Cross Asset Research group.
Inflation Is Not The Problem
July 14, 2008
This week we are going to do something unusual for Outside the Box. Normally I take an essay and send it to you to read. Today I am going to give you a link and strongly suggest you click to it. Long time readers are familiar with friend and comrade James Montier, who along with Albert Edwards, migrated to Societe Generale earlier this year. They are co-heads of Global Cross Asset Strategy and based in London.
Kate Welling does some of the best interviews anywhere in her Welling@Weeden letter, and this one of Montier and Edwards is typical of her immensely enjoyable style. She gave my good friend Prieur du Plessis permission to reprint the letter, and I provide you with a link to his blog and if you scroll down 6 short paragraphs you get the link to the letter, which includes the graphics and is much more fun than just me cutting and pasting. You can also subscribe to Prieur's blog if you wish. Once a week he provides a very useful review of what was written the previous week.
Montier and Edwards speak quite forcefully about the problems they see in the market today, and they are truly Outside the Box thinkers.
"They are, in a word, skeptics, and at this juncture most deeply skeptical of any and all notions that 'the worst is over.' The recession, which has barely begun, is more likely to be deep than shallow, market valuations are hideously expensive and the -flation policymakers should be worried about starts with de-, not in-. For their reasons, keep reading, if you dare."
The link is: http://www.investmentpostcards.com/2008/07/05/market-fundamentals-are-appalling/
And no, despite the picture, they are not twins separated at birth.
The Road To Revulsion
June 16, 2008
What does a bubble look like and how do they end? In this week's Outside the Box, James Montier of Societe Generale in London looks at not only the psychological analysis, but also at the propensity for commentators to continually proclaim the end of the problem and a resumption of business as usual. He includes a fascinating piece from Marc Faber documenting the various quotes about how well the economy was doing from 1928-32. This makes for fun, if a little sobering, reading.
To quote from his summary:
"We have seen the heads of virtually all financial institutions stand up over the last few months and claim the worst is behind us. Why would anyone listen to these people? They didn't see the disaster coming, and yet somehow they are qualified to tell us it is all alright! Perhaps I am just unduly sceptical, but this reeks of a conspiracy of optimism. The recession has barely started, let alone reached its nadir. The market moves of late have all the hallmarks of a classic sucker's rally. This isn't discounting the recovery, this is denial! Far from being behind us, the worst may well still be ahead!"
I think you will find this letter very interesting.
Joining The Dark Side: Pirates, Spies and Short Sellers
May 26, 2008
Is the market over-valued? In this week's Outside the Box, one of my favorite global equity analyst's (and no stranger to regular readers), James Montier of Societe Generale does some very interesting analysis on the European and US markets and finds the number of stocks which make his list as possible for being a "short" is at very high levels. This is a remarkable read and re-enforces my view that we are in a "sell in May and go away" summer. This is really a great Outside the Box. Enjoy.
Asleep at the wheel, or, How I learned to stop worrying and love the bomb
April 7, 2008
For the last few months in my regular letter I have been pounding the table that corporate earnings are going to decline this year, which is always a negative atmosphere for stocks. Since today is the beginning of the earnings season for the first quarter, I thought it would be helpful to look at this piece from our old friend James Montier, head of equity research at Societe Generale based in London. It seems that analysts are behind the curve when it comes to predicting future earnings. James shows us why and then goes on to demonstrate that even the meager earnings reductions that are projected are not priced into the market as many bullish commentators suggest. This should make for an interesting Outside the Box.
The Dash To Trash And The Grab For Growth
January 28, 2008
This week we look at a very thoughtful essay by an old Outside the Box friend James Montier. James is now working at Societe Generale in London. He is one of the truly great minds on the psychology of investing, as well as proving great research on how to structure your portfolio. IN this week's essay, entitled "the Dash to Trash and the Grab for Growth," James shows how investors tend to do the wrong thing at the wrong time in times of market volatility. This is a longer letter with lots of graphs, and there is an executive summary at the beginning, but I suggest you read then when you have 15-20 minutes to really concentrate. You will be a better investor when you do.
The Relative Performance Derby And Other Evils Of Modern Investment
June 25, 2007
This week in Outside the Box we take a gander at the always-insightful research of good friend James Montier, who poignantly addresses the pertinent topic of portfolio diversification and the pitfalls that ensue on account of benchmarking, wherein investors obsess over relative performance and their respective tracking error. James asks the question, why does the average US mutual fund hold 160 stocks, when diversification could be achieved with around 30-40 stocks. The answer in word, benchmarking.
James Montier posits that the average portfolio manager is focused upon short-term relative performance, paying scant attention to total portfolio risk, rather, the inclination of the average PM is to be primarily concerned with tracking error, that being stock specific or idiosyncratic risk. This misguided focus Montier suggests, leads the PM to manage very large portfolios in their attempt to control stock specific risk, holding nearly 4 times the number of stocks needed to meet diversification targets.
The solution you may ask? Montier suggests the utilization of Monte Carlo simulation to construct a universe of potential portfolios subject to construction rules that define your respective investing universe, thus permitting the measurement of skill to a comparable universe and impelling the manager to focus on absolute return performance.
Meaty Beaty Big and Bouncy
April 16, 2007
Today's Outside the Box is by James Montier of Dresdner Kleinwort. Quite frankly, the research that James discusses surprised me. In his article "Meaty beaty big and bouncy," James dispels what he calls an urban myth that small caps tend to outperform large caps. If you disentangle the size and value effects the difference goes away! James goes on to say that even if you still believe in small cap investing, the fact that small caps are trading at a premium to large caps looks insane to him.
James is a highly intelligent analyst as well as a good friend of mine. He always provides a great perspective on the markets with his thought provoking research. For those of you unfamiliar with James and his firm Dresdner Kleinwort, they are a global investment bank with headquarters in London and Frankfurt.
Just as I have found James' conclusions to be fascinating, so I believe that many of you will find his analysis to be "outside the box" regarding portfolio allocation amongst market capitalizations. And for those wondering, the title of the article is from the name of a compilation album of the rock group "Who's" greatest hits.
‘Capital Ideas’ Or ‘CRAP’?
February 19, 2007
Introduction Today I am pleased to present to you an exceptionally interesting article for this week's Outside the Box. But before I do, let me say that it is roughly double in length as normal, so please read it at your leisure. Before I give my 2 cents on it, I would like to both acknowledge and thank Kathryn Welling for her permission to provide you with this. Kathryn is a partner of Welling@Weeden, a service provider of independent, timely and incisive news, research and analysis, to institutional investors. More info can be found on their site: http://welling.weedenco.com.
Her article "Capital Ideas or CRAP?" is an interview between her, Peter Bernstein and James Montier where they discuss an earlier piece written by Montier, which was featured as an Outside the Box. (You can view Montier's original article here.) In the interview, Bernstein takes on the criticism of the CAPM and, in the process, provides a wealth of insights and information. Montier also contributes to the dialogue by expounding upon his previous paper, in addition to sharing some intelligent remarks in reference to Bernstein's comments.
Again, despite the length, I urge you to take the time to read this conversation as the ideas discussed are paramount to gaining a more thorough understanding of the problems we face when making investment decisions. How do you invest in a world with so much competition for capital and ideas? This is one of those extremely insightful pieces you will want to read again and again.
I trust that you will find today's Outside the Box to be a superbly insightful teaching from some great investment thinkers.
CAPM is CRAP, or, The Dead Parrot lives!
January 29, 2007
Within human nature there is a tendency to search for reasoning or logic to validate our own actions. This holds true in the academic sector as models are derived to provide an answer to a scenario, but sometimes such models do not translate well from the world of academia into that of the real world. This week's Outside the Box is presented by James Montier as he discusses his opinion on how the capital asset pricing model (CAPM) has affected the ways in which investors view and measure performance.
James is a good friend and the Director of Global Strategy at Dresdner Kleinwort Watterstein, a London and Frankfurt based investment bank. He is also a prolific writer and author of the book "Behavioral Finance - Insights into Irrational Minds and Markets."
In his article "CAPM is CRAP, or, The Dead Parrot lives!" Montier explains why he thinks the model is empirically bogus and how it has laid the groundwork for the modern day obsession with alpha and beta performance. He goes on to talk about how illogical it is to use relative performance as a metric when compared to measuring returns on an absolute basis.
This is an overall deep piece on the scale of thought but I trust that you will find it valuable in making investment related decisions.
Just A Little Patience
October 23, 2006
In my Friday letter, Thoughts from the Frontline (you can view it here), we looked at how valuation and prices change over market cycles. As I mentioned and have written about extensively in my book Bull's Eye Investing, market cycles should be viewed in terms of valuation and not prices. But how does one capitalize on such a way of thinking? Today's "Outside the Box" will show how several valuation styles and categories have performed over different time intervals, how each styles compares to the other and how each style meshes with the other.
The piece titled "Just a Little Patience" is written by my good friend and fellow investment colleague, James Montier. James is the Director of Global Strategy at Dresdner Kleinwort Watterstein, a London and Frankfurt based investment bank. He is also a prolific writer and author of the book "Behavioral Finance - Insights into Irrational Minds and Markets."
Aided by data from the Quant department of his firm, James dissects a large amount of information in order to present a well-researched report on how value and growth strategies work over time. His conclusions show how patience (defined as a longer time horizon) favors the value investor and hurts the growth investor. One particular note of interest is where James shows the results of a value component in a growth strategy and vice versa.
A key insight to gain is that the prudent and disciplined investor is rewarded for not wavering in his investment methodology, while those that do achieve lower returns. This is one of the more in-depth editions of the year and I trust that you will find it to be "outside the box."
Painting By Numbers: An Ode To Quant
August 21, 2006
What can baseball, wine pricing, medical diagnosis, university admissions and criminal recidivism teach us about the markets? My good friend James Montier thinks there is a lesson to be learned and explains it in his Global Equity Strategy newsletter.
James is the Director of Global Strategy at Dresdner Kleinwort Watterstein, a London and Frankfurt based investment bank. He is also a prolific writer and author of the book Behavioral Finance - Insights into Irrational Minds and Markets.
In his article "Painting by Numbers: An Ode to Quant," James discusses the role of statistics and the value that it provides. He further discusses the psychological implications that investors face as a result of quantitative versus qualitative decision making. While this is not something our egos will like to read, I do believe that you will truly find this to be a thought-provoking piece.
The Limits To Learning
July 3, 2006
This week we look at mistakes and why we don't learn from them, at least not initially. Good friend James Montier explores the limits to learning we all have and offers some help on how to overcome them. Investors are constantly facing these challenges against their own biases when making sound decisions.
James is the Director of Global Strategy at Dresdner Kleinwort Watterstein, a London and Frankfurt based investment bank. He is also a prolific writer and author of the book "Behavioral Finance - Insights into Irrational Minds and Markets."
Maybe for us to be able to think more "Outside the Box" we must first look within our own "boxes." I hope that you find some insight into your own learning process.
The Perfect Value Investor
June 12, 2006
With several of the market averages racking up significant declines, many are starting to wonder if this recent drawdown will present some value opportunities. My good friend James Montier has constructed an insightful study on the characteristics of value investing.
For those who are unacquainted with Mr. Montier, he serves as the Director of Global Strategy at Dresdner Kleinwort Watterstein, a London and Frankfurt based investment bank. He is also a prolific writer and author of the book "Behavioral Finance - Insights into Irrational Minds and Markets."
The Dash to Trash
April 24, 2006
Today we deal with trash. This week's piece is not only regarding the problems with "trash investments" itself but investors' dash towards it! My good friend and fellow writer, James Montier, takes a long look at the market and probes it in search of value. In his article, James walks us through the valuation of different equity classes and the investor sentiment currently surrounding them.
For those who are unacquainted with Mr. Montier, he serves as the Director of Global Strategy at Dresdner Kleinwort Watterstein, a London and Frankfurt based investment bank. He is also a prolific writer and author of the book "Behavioral Finance - Insights into Irrational Minds and Markets."
In his article "The Dash to Trash," James explains how investors have embraced junk and shunned value, causing mispriced valuations with respect to small and large cap equities. Furthermore, he goes on to explore why people not only flock to trash, but why they are willing to pay up for it. Such stocks often lead to little more than volatility and, eventually, poor performance. I hope that you will enjoy this article and maybe, just maybe find some new meaning in the old quote, "One man's trash is another man's treasure."
On The Contrary: Why It Pays To Be Different
January 30, 2006
Two weeks ago in Thoughts From the Frontline, I mentioned a piece by one of my favorite contrarians and behavioral finance analysts, James Montier of Dresdner Kleinwort Wasserstein. It was going to be the Outside the Box last week, but a previous letter by Montier was sent instead.
I normally try not to use the same author two weeks in a row, but this was an exceptional letter and I wanted to bring it to my readers. James pulls together research and observations from many sources in order to prove his point and show that being a contrarian is not always the easy path to follow. I have always said that the time to own equities will be during the next recession when everyone else has given up on them, but that will also be the hardest time to buy. James helps explain why it is so hard to be contrarian and that is why it is this week's Outside the Box.
Emotion, Neuroscience And Investing
January 23, 2006
Once again we look at one of my favorite analysts and behavioral finance thinker, James Montier of Dresdner Kleinwort Wasserstein in London. James wrote a fascinating book two years ago called "Behavioural Finance: A User's Guide" and puts out ongoing research like the one we will enjoy today. Long time readers will recognize the name because I have discussed many of his ideas in my weekly letter "Thoughts From the Frontline," my book "Bull's Eye Investing" and in "Outside the Box." While the article is a little long, I think the insight you get will be able to help bring you to a new level of control over your investing and emotions (or at least your understanding).
This report by James explores how are hard-wired brain affects investing. Emotional decision-making, dopamine, herding and self-control all play a part when are brains are trying to make decisions and James will help you think "Outside the Box."
Scepticism is rare, or, Descartes vs. Spinoza
November 14, 2005
This week's letter is from one of my favorite analysts and behavioral finance thinkers, James Montier of Dresdner Kleinwort Wasserstein in London. James wrote a chapter for my new book, Just One Thing, and this article is very representative of the insightful work he puts out.
This report by James explores why it is that humans tend to believe something that is not true. What he finds is that the more distractions or noise, the more likely a person is to believe something that is false is true. By knowing where our weaknesses are we can program ourselves to be better investors and James will help you think "Outside the Box." (Footnotes are at the end of the article.)
Pictures of a mania? - US Housing
July 4, 2005
Once again we look at one of my favorite analysts and behavioral finance thinker, James Montier of Dresdner Kleinwort Wasserstein in London. James wrote a fascinating book several years ago called "Behavioural Finance: A User's Guide" and puts out ongoing research like the one we will enjoy today. Long time readers will recognize the name because I have discussed many of his ideas in my weekly letter "Thoughts From the Frontline," my book "Bull's Eye Investing" and in "Outside the Box."
This report by James explores whether there is a bubble in the US housing market. He has pulled together data from numerous sources and gives his conclusion that there is a definite bubble. In fact he does not understand how others like myself could argue otherwise and that is why it was picked for this weeks Outside the Box.
Bargain Hunter
March 28, 2005
Once again we look at one of my favorite analysts and behavioral finance thinker, James Montier of Dresdner Kleinwort Wasserstein in London. James wrote a fascinating book two years ago called "Behavioural Finance: A User's Guide" and puts out ongoing research like the one we will enjoy today. Long time readers will recognize the name because I have discussed many of his ideas in my weekly letter "Thoughts From the Frontline," my book "Bull's Eye Investing" and in "Outside the Box."
This report by James explores value versus growth investing. This is a topic covered in my book and what James finds is that while over time both produce roughly the same returns, picking value winners is easier and comes with less volatility. So while the street wants you to buy the exciting story and high growth name, the safer bet is to stick with value.