James Montier - What Worries Me Right Now
James Montier is a member of Grantham Mayo van Otterloo’s (GMO’s) Asset Allocation team. Prior to joining GMO in 2009, he was co-head of Global Strategy at Société Générale. Mr. Montier is the author of several books including Behavioral Investing: A Practitioner’s Guide to Applying Behavioral Finance ; Value Investing: Tools and Techniques for Intelligent Investment ; and The Little Book of Behavioral Investing . Mr. Montier is a visiting fellow at the University of Durham and a fellow of the Royal Society of Arts. He holds a B.A. in Economics from Portsmouth University and an M.Sc. in Economics from Warwick University.
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I spoke with James on Jan. 28.
How do you select the subjects on which you do research? Are there particular publications or information sources that offer good insight or inspirations for the topics you choose?
It’s really tough. The inspiration comes from a wide variety of places, many of which are client-related. Often it comes from conversations with clients around their interests – smart beta and risk parity would be good examples. More often, though, I ask myself, “What do I actually think about that issue?”
A lot of the time, I respond to the issues and the topics the markets throw up. Other times, it’s more direct. Once or twice I’ll come across something and think, “No, I really don’t agree with that.” Looking for the evidence that I disagree with is always useful, so I spend a reasonable amount of time reading people with whom I definitely do not agree.
Jeremy Siegel is a pretty good example of somebody in that camp at the moment, with his views on the inadequacies of the Shiller cyclically adjusted price-earnings ratio (CAPE). Then I think about how I might battle with the potential logical flaws are in those arguments.
Siegel’s argument, if I understand it correctly, is not with the CAPE methodology. It’s with the underlying data that’s being used. He’s argued that the national income and products account (NIPA) data should be used rather than the S&P data that Shiller has been using, and that if you use the NIPA data you come to different conclusions. What are your thoughts on that?
The attacks on the CAPE are kind of odd, right? It hasn’t done a bad job. It works. A large part of me says, “Well, if it’s not broken, why the hell are you trying to fix it?” People say, “Well, valuations haven’t mean-reverted for the last 20 years.” My response is, “No, but returns, frankly, have been very poor for the last 20 years.” So there is no inconsistency between a high valuation and low returns.
I think Siegel’s main point is that goodwill accounting misses half of the data. Yes, goodwill accounting has certainly increased the volatility of earnings. But also we had a situation during the crisis, somewhere around March 2009, almost exactly at the bottom, when the accounting authorities suspended FASB rule 157, which was the mark-to-market rule.
All of a sudden, financial institutions could lie with impunity. They no longer had to recognize any of the impact of asset deterioration on their earnings. One can make an equal case on the other side that earnings probably recovered too fast because of that suspension of the rule. That may have created a rather weird pattern. Maybe those two patterns offset, and therefore that is one of the reasons you should take a 10-year average, as the CAPE methodology employs.