James Montier, a global financial strategist and expert in behavioural finance, put some points out in a White Paper published by US fund managers, GMO, titled “Was it all just a bad dream? Or Ten lessons not Learnt.”
He starts off by saying that the market declines of 2008 and early 2009 are being treated as nothing more than a bad dream…. The extreme brevity of financial memory is breathtaking.
He put together 10 of the top lessons he thinks investors seem to have failed to learn. I will list them and then over the next few days discuss a couple in more detail.
1. markets aren’t efficient
While many practitioners seem willing to reject the EMH (efficient market hypothesis), the academics refuse to jettison their treasured theory.
2. relative performance is a dangerous game
He quotes the late sir John Templeton, who said, “It is impossible to produce a superior performance unless you do something different from the majority.”
3. the time is never different
His conclusion on this point – “…investors get caught up in all the details and the noise, and forget to keep an eye on the big picture.”
4. valuation matters
While it is self evident that buying when cheap, he says that he has repeatedly come across investors willing to undergo mental contortions to avoid the valuation reality.
5. wait for the fat pitch
using a baseball analogy of waiting for the perfect moment when patience is rewarded as the ball meets the sweet spot.
6. sentiment matters
Investor returns are not only affected by valuation – sentiment plays a part.
7. leverage can’t make a bad investment good, but it can make a good investment bad.
Piling leverage onto an investment with a small return doesn’t transform it into a good idea.
8. over-quantification hides real risk
The obsession with overly complex mathematics hides real risks – which should ultimately be defines as the permanent loss of capital.
9. macros matters
Neither a top down view, nor a bottom up view has a monopoly on insight. He concludes that we should learn to integrate their dual perspectives.
10. look for sources of cheap insurance
His final lesson is that insurance is often a neglected asset when it comes to investing. It is the steady short term losses (premiums) that makes insurance seem unattractive to many investors. However this disliked feature often results in insurance being cheap.
Some good points, which I will expand upon.
Kind regards
Ian de Lange
info@seedinvestments.co.za
www.seedinvestments.co.za
021 9144 966