.© 2004-2019 GuruFocus.com, LLC. All Rights Reserved.Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security.
- James Montier Seven Sins Of Fund Management Software
- James Montier Seven Sins Of Fund Management Company
The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages.
Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC.Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.
I was cleaning out some files and came across the fantastic James Montier PDF ““. (If you want the Cliff’s note version check out his recent book.)There was a great quote from Lao Tzu, a 6th century BC poet, “Those who have knowledge don’t predict. Those who predict don’t have knowledge.”This reminded me of a conversation I had with the Chief Economist of a major I-bank when I just graduated college. We were out skateboarding (technically on a FlowBoard) down the paved streets of San Francisco. The FlowBoard allows the user to basically snowboard down paved streets. We would take a lift (car) back up then skate back down Rivera or Sloate streets. Pretty amazing and one of those experiences you only get in the Bay Area.
Imagine going skateboarding with the head of Goldman in NYCAnyways, one of the simple questions I had was – “If people have such a rotten record of forecasting, specifically, why do we have a Federal Reserve Chairman/Committee adjusting interest rates at all? Why not simply peg them to some basket of commodities, goods, or other inflation measure.” He went on an hour long diatrtibe, and that debate is not the point of this post. Rather, I wanted to point out a few of the great charts from the PDF highlighting the terrible record of forecasting in general.
From Montier:The two most common biases are over-optimism and overconfidence. Overconfidence refers to a situation whereby people are surprised more often than they expect to be. Effectively people are generally much too sure about their ability to predict. This tendency is particularly pronounced amongst experts. That is to say, experts are more overconfident than lay people. This is consistent with the illusion of knowledge driving overconfidence.Dunning and colleagues have documented that the worst performers are generally the most overconfident.
James Montier Seven Sins Of Fund Management Software
They argue that such individuals suffer a double curse of being unskilled and unaware of it. Dunning et al argue that the skills needed to produce correct responses are virtually identical to those needed to self-evaluate the potential accuracy of responses. Hence the problem.Why do we persist in using forecasts in the investment process? The answer probably lies in behaviour known as anchoring.
That is in the face of uncertainty we will cling to any irrelevant number as support. So it is little wonder that investors cling to forecasts, despite their uselessness.The first chart shows economists attempts to forecast the rate of inflation as measured by the GDP deflator. Sadly it reveals a pattern that will become all too common in the next few charts. Economists are really very good at telling you what has just happened! They constantly seem to lag reality. Inflation forecasts appear to be largely a function of past inflation rates.The economists are bad, but what about bond forecasters?Not only are bond forecasters bad at guessing the level of the yield, they can’t get the direction of yield changes right either. The table below (in PDF) shows that when yields were forecast to rise, they actually fell 55% of the time!The same thing occurs for both equity strategists and analysts. Research plan academic job sample.
So, the question is, why forecast at all?
IntroductionWith several of the market averages racking up significant declines, many are starting to wonder if this recent drawdown will present some value opportunities. My good friend James Montier has constructed an insightful study on the characteristics of value investing.For those who are unacquainted with Mr. Montier, he serves as the Director of Global Strategy at Dresdner Kleinwort Watterstein, a London and Frankfurt based investment bank.
He is also a prolific writer and author of the book 'Behavioral Finance - Insights into Irrational Minds and Markets.' I trust that you will find this research to be beneficial to your investment thinking.John Mauldin, Editor. Join China expert and former Goldman Sachs hedge fund manager Robert Hsu.
Plus, get immediate online access to his brand-new free report, '6 Ways to Double Your Money Safely in the China Miracle.' Don't miss out. Yours free for a limited time!The Perfect Value Investorby James MontierOccasionally when I present on the seven sins of fund management, someone at the end (obviously a valiant soul who has managed to stay awake) will ask me how I would structure an investment process. In the spirit of good politicians everywhere, I am going to save my answer to that question for another weekly. However, I recently read a paper along similar lines that I thought was worth sharing. Louis Lowenstein of Columbia University examined 10 value managers selected by Bob Goldfarb, CEO of Sequoia Fund. Lowenstein asked him to select ten dyed-in-the-wool value investors who all followed the essential edicts of Graham and Dodd; obligingly, Goldfarb selected the list below.
To this list we have added a second Tweedy Browne fund, Tweedy Browne Global Value. Trait I: High concentration in portfoliosContrary to the proclamations of classical finance, these investors tend to run highly concentrated portfolios.
No portfolio diversification for these guys. Tracking error has little or no meaning to this group of investors.Across these funds, on average, nearly 40% of the assets are in the top ten holdings. Across a wide universe of funds, the top ten holdings account for only around 10% of assets. The average number of stocks held is around 35 (and this is raised by the presence of three international funds, it would be closer to 20 for the domestic-only funds). In contrast, the average US domestic mutual fund holds around 160 stocks!This seems to reflect a different philosophy on two counts. Firstly, these value managers seem to need a reason to invest - not investing is their default, so in order to actually go out and buy a stock, these investors need to be convinced of the merits.
Presumably in accordance with Graham and Dodd's guiding principles, this is represented by a margin of safety. As Graham wrote, 'The margin of safety is the central concept of investment. A true margin of safety is one that can be demonstrated by figures, by persuasive reasoning and by reference to a body of actual experience'.Secondly, the average fund management outfit appears to be run either by the risk management department or the marketing department. I've come across several examples of this in the last few years. One client was relaying to me the joys of his risk managers telling him that he had to deploy more risk, because he was under his risk budget! Of course, when markets fall, those very same risk managers with their trailing correlation and volatility will be the first in line to tell you to sell your positions.
Risk managers are the financial equivalent of those who give out umbrellas on dry days, but snatch them back as soon as it starts to rain.Another informed me that they were setting up a commodity fund. Because the marketing department said there was an appetite for such a product. Does this not strike anyone as vaguely (and perhaps alarmingly) like the TMT bubble?The result of these bizarre dynamics is that the average fund manager is more worried about tracking error and benchmark risk, than about finding the best investment for his clients. So their default is likely to be ownership. Hence they need a good reason not to invest in a stock.
The fiduciary responsibility to the client is forced to take a backseat. Perhaps investment managers should take an equivalent of the Hippocratic Oath to do no harm.As is often the case, Maynard Keynes sided with the value investors. He wrote:To suppose that safety-first consists in having a small gamble in a large number of different companies where I have no information to reach a good judgement, as compared with a substantial stake in a company where one's information is adequate, strikes me as a travesty of investment policy.Letter to F.C. Scott, February 6, 1942 (The collected writings of John Maynard Keynes).This was a view shared by Loeb in his classic, The Battle for Investment Survival.
He opined, 'Diversification is an admission of not knowing what to do, and an effort to strike an average'.It should be noted that concentrated portfolios are not, in and of themselves, a deliberate choice on the part of these funds, but rather stem from their investment discipline. There simply aren't that many good value opportunities to be found. The Brandes Institute published a paper in late 2004 exploring the use of concentrated portfolios.
They concluded, 'In aggregate, and across peer groups, we find that concentrated portfolios, in and of themselves, do not provide improved returns, nor do they provide improved volatility-adjusted returns'. This emphasizes the fact that the concentration amongst our group of value investors is the result of a process rather than a deliberate decision in its own right.A graphic illustration of this point can be seen by examining the performance of a basket of stocks that Fortune assembled in the year 2000. The basket was labeled '10 stocks to last the decade - here's a buy-and-forget portfolio'. The aim of the stocks was to allow you to 'retire when ready', according to Lowenstein. The list of companies is shown below.
Only one of these stocks had a PE of less then 50x! The investors in our value group focus themselves upon business risk - will profit margins shrink? Are there risks on the balance sheet?
- rather than market risk (stock volatility), which these investors seem to treat with the scorn it deserves. They know that the market as a whole is best characterized as suffering bipolar disorder (the proper name for manic depression). As Ben Graham wrote:One of your partners, named Mr. Market, is very obliging, indeed. Everyday he tells you what he thinks your interest is worth and furthermore offers either to buy you out or sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them.
Often, on the other hand, Mr. Market lets his enthusiasm or fears run away with him, and the value he proposes seems to you a little short of silly. Trait II: They don't need to know everything, and don't get caught in the noiseThe investors in this group seem to be aware of the need to focus on a few key items of information, rather than attempting to try and overload themselves with noise. Lowenstein quotes Marty Whitman of the Third Avenue Value Fund as saying, 'the fund doesn't have superior information; ‘the trick' is to use publicly available information in a superior manner'. To this end, these funds don't employ legions of analysts wasting time forecasting next quarter's EPS; instead, they spend their time trying to understand the valuation and associated risks.Trait III: A willingness to hold cashTheir willingness to hold cash is clearly visible from a cursory glance at the table on page 2. Currently they hold around 11% cash, nearly 3x the level held in the average US mutual fund. The average hides a wide range of current cash levels.
For instance, FPA Capital is holding nearly 39% cash whilst Legg Mason Value holds a mere 1.1% cash. Most of the traits displayed stem from the underlying philosophy of the funds in question.
James Montier Seven Sins Of Fund Management Company
The generalized willingness to hold cash is the result of lack of investment opportunities. In his year-end letter to shareholders of 2003, Seth Klarman wrote that his large cash position was the 'result of a bottom-up and failed search for bargains'.
Windows 10 details pane bottom. To do so, click on the View tab, then click on the icon for 'Navigation pane.' If you like to use libraries and want them easily accessible, you can set them to display in File Explorer. From the menu, click on the check mark to 'Show libraries.'
The guiding principle amongst our group of value gurus is, to borrow Buffett's expression, 'holding cash is uncomfortable, but not as uncomfortable as doing something stupid'.Trait IV: Long time horizonsI have often remarked that inherent within a value approach is the acceptance of long time horizons. You never know when a stock will reflect a sensible value.
A good example was provided by the UK market in early 2003. The dividend yield on the UK market was higher than the 10-year government bond yield, suggesting that dividends were expected to decline on a decade view. Total war attila iso download.
This struck me as just plain wrong. A plethora of valuation work showed the UK to be unambiguously cheap (for details see Global Equity Strategy, 30 January 2003). The presence of forced sellers was making the UK market a bargain.However, as with all bargains, they can repay you in one of two ways.
Firstly, prices could correct. Secondly, they could just generate a high return via paying out high dividends for a long period of time.
You never know which path will be taken. Hence the need for long time horizons.Our selection of value managers all display long horizons. The average stock-holding period amongst these funds is over five years. The maximum is 17 years, the shortest 3 years. All compare favorably with the mutual fund industry's average stock-holding period of just 1 year (according to Morningstar).This is supported by the chart below showing that average holding period for stocks on the NYSE. Back in the 1950s/1960s, investors used to do exactly that: invest. The average holding period was 7-8 years.
However, today it appears as if everyone has become a speculator, with an average holding period of just 11 months.When I present these findings, investors often dismiss the picture as yet further evidence of the way in which hedge funds have altered the investment landscape. However, the Morningstar data above, and the data from John Bogle below, show that long-only fund managers are just as much to blame for the time horizon shrinkage as the hedge funds. This may be because they feel the need to compete with the hedge funds but, regardless, they are certainly complicit in the shift from investment to speculation. As Munger and Buffett have noted on many occasions, 'If the job has been correctly done when a common stock is purchased, the time to sell it is - almost never'.Trait V: An acceptance of bad yearsNearly all of the funds in our list have witnessed periods of negative returns, and/or underperformance relative to a benchmark (although note Trait I on the disregard for such items). Many of them saw large redemptions during the TMT bubble, but were prepared to stick to their tried and tested approach to investing. Lowenstein cites Eveillard (manager of the First Eagle Global Fund) as saying, 'I would rather lose half my shareholders than lose half my shareholders' money'.Despite the very impressive performance data contained in the table on page 2, many of the funds examined have underperformed the index in as many as seven years out of the last ten! Absolute losses are relatively rare, with only 2 or 3 years seeing negative returns in the last 10.In a paper published by Tweedy Browne, they report a study that showed for a group of value investors with excellent long-term track records, that underperforming an index some 30-40% of the time was perfectly normal.
This fits well with our previous study of underperformance using an artificial universe of skilled fund managers who, despite having an information ratio of 0.5, saw 70% of their numbers witness 3 or more years of consecutive underperformance (see Global Equity Strategy, 7 June 2005). Trait VI: Prepared to close fundsIn a world where asset managers are often rewarded with reference to funds under management, the quotation from Eveillard above is, sadly, an unusually ethical approach. Indeed, many of these funds display unusually high ethical behavior and high levels of self control; in as far as many of these funds are closed to new investment. The managers are highly cognizant that there are limits to the size of funds which they are capable of running without hitting problems.ConclusionYour always looking for value analyst,John F. DisclaimerJohn Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.Opinions expressed in these reports may change without prior notice.
John Mauldin and/or the staffs at Millennium Wave Advisors, LLC and InvestorsInsight Publishing, Inc. (InvestorsInsight) may or may not have investments in any funds, programs or companies cited above.PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS.
Over a decade ago, James Montier penned a white paper titled Seven Sins of Fund Management. It covers the most common behavioural biases among investors and makes for a timeless, enlightening read. The full report can be found and is 105 pages long, so a brief summary is in order. Sin 1: ForecastingAn enormous amount of evidence suggests that we simply cannot forecast. Montier suggests that anchoring bias and over-confidence cause investors to continue relying on forecasts in their investment decisions.
Sin 2: The illusion of knowledgeInvestors appear to believe that they need to know more than everyone else in order to outperform. This stems from an efficient markets view of the world. If markets are efficient, then the only way they can be beaten is by knowing something that everyone else does not. This is paradoxical because it is the pockets of inefficiency that allow for.
Behavioural investing seeks to bridge the gap between psychology and investing. All too many investors are unaware of the mental pitfalls that await them. Even once we are aware of our biases, we must recognise that knowledge does not equal behaviour. The solution lies is designing and adopting an investment process that is at least partially robust to behavioural decision-making errors.Behavioural Investing: A Practitioner’s Guide to Applying Behavioural Finance explores the biases we face, the way in which they show up in the investment process, and urges readers to adopt an empirically based sceptical approach to investing.
This book is unique in combining insights from the field of applied psychology with a through understanding of the investment problem. The content is practitioner focused throughout and will be essential reading for any investment professional looking to improve their investing behaviour to maximise returns. Key features include:. The only book to cover the applications of behavioural finance. An executive summary for every chapter with key points highlighted at the chapter start.
Information on the key behavioural biases of professional investors, including The seven sins of fund management, Investment myth busting, and The Tao of investing. Practical examples showing how using a psychologically inspired model can improve on standard, common practice valuation tools. Written by an internationally renowned expert in the field of behavioural finance.
JAMES MONTIER is the global equity strategist at Dresdner Kleinwort in London. He has been the top rated strategist in the annual Extel survey for the last two years. He is also the author of Behavioural Finance, published by Wiley in 2000.
James was on the 50 must read analysts list complied by the Business magazine, and was one of the Financial News' Rising Stars.James is a regular speaker at both academic and practitioner conferences, and is regarded as the leading authority on applying behavioural finance to investment. He is also a visiting fellow at the University of Durham. James is also a fellow of the Royal Society of Arts. He has been described as a maverick by the Sunday Times, an enfant terrible by the FAZ, and a prophet by the Fast Company! When not writing or reading, he can usually be found blowing bubbles at fish and swimming with sharks.
Preface xviiAcknowledgments xxiSECTION I: COMMON MISTAKES AND BASIC BIASES 11 Emotion, Neuroscience and Investing: Investors as Dopamine Addicts 32 Part Man, Part Monkey 173 Take aWalk on the Wild Side 374 Brain Damage, Addicts and Pigeons 475 What Do Secretaries’ Dustbins and the Da Vinci Code have in Common? 556 The Limits to Learning 63SECTION II: THE PROFESSIONALS AND THE BIASES 777 Behaving Badly 79SECTION III: THE SEVEN SINS OF FUND MANAGEMENT 958 A Behavioural Critique 979 The Folly of Forecasting: Ignore all Economists, Strategists, & Analysts 10510 What Value Analysts? 12311 The Illusion of Knowledge or Is More Information Better Information?
13312 WhyWaste Your Time Listening to Company Management? 14313 Who's a Pretty Boy Then? Or Beauty Contests, Rationality and Greater Fools 16114 ADHD, Time Horizons and Underperformance 17915 The Story is The Thing (or The Allure of Growth) 18916 Scepticism is Rare or (Descartes vs Spinoza) 19717 Are Two Heads Better Than One?
209SECTION IV: INVESTMENT PROCESS AS BEHAVIOURAL DEFENCE 21718 The Tao of Investing 219PART A: THE BEHAVIORAL INVESTOR 22319 Come Out of the Closet (or, Show Me the Alpha) 22520 Strange Brew 23521 Contrarian or Conformist? 24722 Painting by Numbers: An Ode to Quant 25923 The Perfect Value Investor 27124 A Blast from the Past 27925 Why Not Value? 'It is quite simply the best and most comprehensive treatment of the subject to date.' ( Financial Times, Monday 3rd December 2007)'The Year's most exhaustive, and often entertaining, coverage of the behavioural literature.'
( Financial Times, Saturday 15th December 2007)'.one of the few 'must read' books on the topic of investing.' ( The Herald - Glasgow, Saturday 2nd February 2008)'a fantastic insight into how markets operate and one of the few 'must read' on the topic of investing.' ( The Herald, Sat 2nd February 2008)Series.