GMO's James Montier has just released an essay entitled "The Seven Immutable Laws of Investing". Montier is always a good read having shaken up the city and built his reputation with some left field research notes as global strategist at previous employer Societe Generale. Famous notes included tomes on how to be happy in spite of being a financier - not exactly par for the research note course. His contrarian stance has always been driven by a core belief in the importance of value investing and the lessons of behavioural finance and his Seven Laws are repeated below.
- Always insist on a margin of safety.
- This time is never different.
- Be patient and wait for the fat pitch.
- Be contrarian.
- Risk is the permanent loss of capital, never a number
- Be leery of leverage
- Never invest in something you don't understand.
The list echoes with soundbites lifted from the work of classic value investors including Benjamin Graham, John Templeton and Warren Buffett - and while there may not be anything original in the list, that really is the whole point; value investors have always believed there's nothing new under the sun but the latest fad of the crowd.
He goes on to state that no asset class offers a margin of safety today, with his firm forecasting near zero real returns for US bonds and equities over the next 7 years. The choice of investing in equities over bonds he describes as an 'ugly stepsisters' problem - being forced to date one of them when you'd rather date neither - and lambasts the so called 'Fed Model' (which compare the S&P 500 earnings yield to Treasury bond yields as a valuation metric) as being completely unsound at every turn. The paper also highlights complacency amongst fund managers with charts showing the 'overwhelming consensus in favour of equities against cash'.
Of course in stating that 'nothing offers a good margin of safety' Montier is talking from the perspective of being an asset allocation professional rather than as a stock picker. Within fairly or even over valued asset classes such as equities, you are still going to find a wide range of securities offering varying levels of opportunity, and a paper like this shouldn't make people throw the baby out with the bathwater. On the other hand, when a strategist with the track record of James Montier cautions that investors should be looking to raise cash, in a time of heightened global macro risk it's advice that would be well worth heeding if you are holding speculative assets.
The full paper can be downloaded from the GMO website on registration http://www.gmo.com/.