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Value Investing: Tools and Techniques for Intelligent Investment

James Montier (2009)

Why Read It?

· · · Provides a compendium of pieces and speeches from the author, written while chief strategist at Société Générale. Rejects the precepts of modern portfolio theory (MPT) and almost all of its tools and techniques, including the capital asset pricing model (CAPM). Sets out the core principles involved in following a value approach, via Montier's "ten tenets" of investing.

Getting Started

Value Investing argues that MPT hinders rather than helps investors, and explains the most dangerous (and one of the most common) errors that investors make--that is, overpaying for the hope of growth. He provides empirical evidence to support his beliefs. Uniquely, Montier describes how short selling can be a valuable tool for an investor. He also supplies real-time analysis of the market's behavior over the recent financial crisis, one of the most turbulent periods in investment history.

Author

James Montier is a member of GMO's asset allocation team. Prior to that, he was Global Strategist for Société Générale and Dresdner Kleinwort. He has been the top-rated analyst in the annual Extel survey for most of the last decade. He is visiting fellow at the University of Durham and a fellow of the Royal Society of Arts.

Context

· · · · · · · Explains why the value investment approach has allowed the small minority of investors who have adopted this strategy (which has been recognized for at least 75 years) to outperform the market. Compares the efficient market hypothesis (EMH) to Monty Python's Dead Parrot--believers just won't accept that it doesn't work. Argues that there is an overwhelming body of evidence that shows that CAPM simply does not work, and explains why this is the case. Contends that in the world of finance a love of numbers has replaced a desire for critical thinking, and that investment professionals are guilty of using pseudoscience to promote an illusion of safety. Argues that diversification "lies close to the heart of many financial disasters" and that holding too many stocks in a portfolio is a key source of underperformance. Sets out his 10 core principles of investing, including a focus on value, and adopting a contrarian, unconstrained, and skeptical approach. Concludes that valuation is the primary determinant of long-term returns.

Impact

· · Provides an excellent guide to value investing, written by an expert in this area but in a way that any layman can understand. Presents a compelling argument in favor of value investing by using real examples and data to support this approach.

Value Investing: Tools and Techniques for Intelligent Investment

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· · ·

Convincingly argues that many of the investment tools, techniques, and theories used by investment professionals simply do not work. Explains how an investor can use the 10 tenets of Montier's investment creed to adopt the value approach. A must-read for investment professionals and individual investors who wish to outperform the market over the long term.

Quotations

"The efficient market hypothesis (EMH) is the financial equivalent of Monty Python's Dead Parrot. No matter how much you point out that it is dead, the believers just respond that it is simply resting." "The promise of growth has a seductive allure, much like the siren's song. However, it rarely pays for investors to do what is comfortable." "Perhaps the most persistent `mistake' I encounter among investors is overpaying for the hope of growth. Nowhere is this behavior currently more evident than in the context of emerging markets."

More Info

Books:

· Graham, Benjamin, and David Dodd. Security Analysis. 6th ed. New York: McGraw Hill, 2008. Graham is often described as the first proponent of value investing, and this book first brought the concept to the public's attention. Now updated with commentary. Greenwald, Bruce C. N., Judd Kahn, Paul D. Sonkin, and Michael van Biema. Value Investing: From Graham to Buffett and Beyond. New York: Wiley, 2001. A book that seeks to update and expand Benjamin Graham's ideas.

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See Also

Viewpoints · Viewpoint: James Montier Finance Library · · Portfolio Selection: Efficient Diversification of Investments Portfolio Theory and Capital Markets

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