Value Investing -. Tools and Techniques for Intelligent Investment. Author: James Montier. • Through behavioural finance, you can find ways to override. But deep down, he is a full-blooded value investor who believes that valuation-indifferent investing will result in tears. That is his Holy. In his book Value Investing: Tools and Techniques for Intelligent Investment, James Montier writes that “ the permanent loss of capital can be split into. WHAT IS BAT CRYPTOCURRENCY
Today investors are surrounded by analysts who are experts in their fields. I once worked with an IT analyst who could take a PC apart in front of you, and tell you what every little bit did, fascinating stuff to be sure, but did it help make better investment decisions? Clearly not. Did the analyst know anything at all about valuing a company or a stock? Yet he was immensely popular because he provided seductive details.
Miguel: Interestingly you connect the dangers of irrelevant information to modern risk management. James Montier: Sure. Modern risk management is a farce; it is pseudoscience of the worst kind. The idea that the risk of an investment, or indeed, a portfolio of investments can be reduced to a single number is utter madness. In essence, the problem with risk management is that is assumes that volatility equals risk. Nothing could be further from the truth.
Volatility creates opportunity. For instance, was the stock market more risky in or ? According to views of risk managers, was the less risky year, it had low volatility, which they happily fed into their risk models and concluded falsely that the world was a safe place to take risk. In contrast, these very same risk managers were saying that the world was exceptionally risky in , and that one should be cutting back on risk. This is, of course, the complete opposite of what one should have been doing.
Risk managers are the sorts of fellows that lend out umbrellas on fine days, and ask for them back when it starts to rain. Give us an example of how this harms investors. James Montier: The best example of narrow framing that I can think of is the use of pro forma earnings. Think about what pro forma earnings mean….
Investors regularly fail to look through the way information is presented to them in this fashion. Miguel: You talk about the benefits of reverse engineering DCF models — as a check on implied growth rates.
Run us through the basic steps of a reverse dcf? However, its implementation is riddled with pitfalls. With enough creativity a DCF can turn out any answer you like. So rather than try and combat this, I prefer to use reverse dcf. This effectively takes the market price, and backs out the growth that would be required to justify the current price. I can then compare that implied growth against a historical distribution of all company growth rates over time and see whether there is any chance of that growth actually being achieved.
In terms of the mechanics, these things can be as simple or as complex as you like. I tend to use a three stage model. I use the analyst inputs for the first three years, a trend GDP related growth rate for the terminal years, and then infer what the market implies for the middle period of growth.
That is a cyclical sector with an implied growth rate double a generous estimate of nominal GDP growth. Cyclicals masquerading as growth stocks rarely end well for investors. Why do investors overpay for beauty and underpay for toads…after all they are one step away from becoming princes, are they not? This heuristic complements the Anginer, et all study where ugly defendants are more likely to be found guilty and receive longer sentences than attractive defendants.
James Montier: We humans have a bizarre bias against a bargain. For instance, my friend Dan Airely has done some great experiments in this field showing some pretty odd findings. The only snag is that the two wines are exactly the same. The same thing happens with pain killers. It is why branded pain killers exist alongside generic equivalents.
They both have exactly the same active ingredient, but people report the branded version works better. I suspect that something similar happens with stocks. The Anginer et al study shows some similar findings in the legal context. Ugly defendants get far worse sentences than attractive defendants. We have a hard time believing that attractive people could have been bad — a kind of halo effect, if you will. Tell us about the Trinity of Risk. Which of the three components do you think is the hardest to monitor, why?
First, there is valuation risk — you can simply overpay for an asset. Second, there is fundamental or business risk — something goes wrong with the underlying economics of the asset. I think you to consider all three aspects in order to gain a holistic view. Miguel: Why are we so terrible at predicting our emotions? James Montier: I wish I knew. However, all the evidence shows that we are truly appalling at predicting how we will act in the heat of the moment.
However, when that lower price arrives, we are caught like rabbits in the headlights. Learning to master your emotions is one of the most valuable things that investors can learn to do. What a wise statement; tell us more. James Montier: Regrettably, knowledge and behaviour are not the same thing. Now I know this, and I know that the easiest way for me to remedy this situation is for me to eat less.
The same is true when it comes to investing. We need to force ourselves to actually change our behaviour by altering the way we approach investing. Tell us how you look at cycles. Are there any indicators or measurements you rely on? The Philly Fed have a good by which I mean timely index called the ADS measure which tracks where we are in real time.
Miguel: 2. You praise skepticism…How do you balance skepticism with a perma bear bias? James Montier: To me skepticism means questioning what I hear. That tends to lead to a contrarian perspective. When nothing much is happening in the market, investors need to follow their own analysis and prepare a plan of action, he says.
Montier suggests investors to fix their buy prices well in advance so that when the market goes into panic mode and prices fall to a level that they have fixed, they can buy at that fixed price. Montier feels investors who get influenced by emotions, especially get affected by fear while people who invest using their rational mind are less affected by it.
He says if someone wants to achieve success, he should invest when the stock price is falling and there is market panic without taking any stress. To avoid getting stressed, he advises investors to have some cash or bonds as dry powder to invest when the market goes down. But Montier says following experts or other peers blindly may be hazardous to making money.
He says it has been proven that trading too often because of over-confidence results in poorer returns. According to Montier, it is unlikely for any expert to outsmart everyone by buying before everyone else and selling before the herd dashes for the exit. Montier feels investors tend to be curious about what will happen to the price of an investment and use forecasts to determine the value of an investment.
Instead of using forecasts, investors should try to understand the nature of the business and its intrinsic worth. One can also compare earnings power value to asset value or can try to find out where they are in relation to cycles that have occurred in the past. Investing without pretending to know the future gives you a very different perspective and you do not need to forecast to be successful at investing," says he. We do need information, but they need to be good information, something you can put in a simple checklist.
It is far better to focus on what really matters rather than succumbing to the noise that goes on daily in the investing world. Montier advises investors to be wary of these price fluctuations which can help them invest better. Montier says investors should instead hear the opposite side of the argument, which can help them weigh both the pros and cons of an investment. We also tend to see all information as supporting our hypothesis and we distort the information to suit our existing preference.
We need to look for evidence that would prove our own analysis wrong. He advises investors not to hold on to a stock simply because they think it is a great investment even if it is not doing well. He feels investors should periodically review their investments and start afresh if existing investments are not doing well.
If we will not, then we might be better off selling. Or we should spend time criticising what we have invested in. Or rarely, should we sell everything and start off with a clean slate and invest again," says he. Investors often make the mistake of abandoning evidence in favour of a good story.
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