James Montier on Fear and Investment (Podcast)

Episode Summary

Executive Summary: In this episode, Barry Ritholtz interviews James Montier, a member of the GMO asset allocation team. Montier discusses his role as a contrarian thinker who questions models and identifies cheap assets. He explains the challenges of value investing, the importance of a margin of safety, and behavioral biases. He also addresses issues like the US market premium, negative interest rates, and modern monetary theory, while sharing personal insights on happiness and investing discipline.

Main Topics: The Role of a Contrarian Investor at GMO (Priority: 5/5): Montier describes his job as questioning models, identifying where they might be wrong, and advocating for undervalued assets, particularly when markets crash. Value Investing and Margin of Safety (Priority: 5/5): The conversation emphasizes the importance of buying assets when they are cheap with a margin of safety, and the discipline required to stick to a long-term value strategy during volatile markets. Behavioral Biases in Investing (Priority: 4/5): Montier explains how evolutionary psychology leads to fear-driven decisions and poor investment choices, contrasting normal investors with those unable to feel fear. Current Market Opportunities: EM and International (Priority: 4/5): Discussion on why emerging markets and Europe are attractively priced compared to the US, and the challenges of investing in countries with political risk. Modern Monetary Theory (MMT) and Fiscal Policy (Priority: 3/5): Montier defends MMT as a descriptive model of the world, arguing that budget deficits are less problematic than commonly believed, especially for monetarily sovereign nations. Challenges to Mean Reversion (Priority: 4/5): The debate over why the US maintains a premium valuation over international markets, despite arguments like low interest rates or higher quality companies being insufficient to justify the gap. Happiness and Materialism (Priority: 2/5): Montier shares his research on happiness, noting that beyond a certain income threshold, material pursuits do not lead to lasting satisfaction, whereas experiences do.

Key Arguments: Value investing requires a long-term horizon and discipline to stick with a plan during volatility. Montier emphasizes the importance of having a valuation-based process to guide decisions. Behavioral biases, such as fear and evolutionary responses, lead investors to make poor decisions like selling during market declines, unlike patients with amygdala damage who act rationally. The US equity premium over international markets is not fully justified by low interest rates or higher quality companies; mean reversion is likely but timing is uncertain. Negative interest rates are a tax on banks and are unlikely to stimulate economic activity effectively; they are an odd policy with unknown consequences. Modern Monetary Theory is a more accurate description of how sovereign currencies work, and budget deficits are not as dangerous as the 'household analogy' suggests, based on evidence from Japan and current US policy.

Data Points: Market decline: 35% - Markets dropped 35% last month, prompting Montier to consider buying opportunities. Gazprom P/E ratio: ~2x - Russian energy company Gazprom trades at a P/E of about 2, considered ludicrously cheap. Gazprom dividend yield: 6-7% - Gazprom's dividend yield offers a substantial return for taking political risk. UK wage subsidy: 80% - The UK government is underwriting 80% of people's wages in response to the coronavirus outbreak.

Pivotal Quotes: "I'm paid to sit here and think about life, the universe, and everything, and really understand as much of that as I can and make sure that we are investing in a way that kind of makes sense." — James Montier: Montier describes his job at GMO as a research role focused on thinking and solving puzzles. "This time is never different." — James Montier: Referencing John Templeton, Montier argues that bubbles and manias have historical parallels, and the details change but the core patterns remain the same. "The older I get, the less certain I am about almost everything." — James Montier: Montier reflects on his early overconfidence, a lesson learned from a costly trade early in his career.

Implications: Investors should focus on long-term valuations and discipline, especially during market dislocations. Behavioral biases need to be managed through process design, not willpower. Current opportunities in non-US equities may offer high margins of safety, but require patience. Policy debates around MMT and negative rates will continue to shape markets.