Value Investing - Tools and Techniques forIntelligent Investment
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"As with his weekly column, James Montier's Value Investing is a must read for all students of the financial markets. In short order, Montier shreds the 'efficient market hypothesis', elucidates the pertinence of behavioral finance, and explains the crucial difference between investment process and investment outcomes. Montier makes his arguments with clear insight and spirited good humor, and then backs them up with cold hard facts. Buy this book for yourself, and for anyone you know who cares about their capital!"
—Seth Klarman, President, The Baupost Group LLC

The seductive elegance of classical finance theory is powerful, yet value investing requires that we reject both the precepts of modern portfolio theory (MPT) and pretty much all of its tools and techniques.

In this important new book, the highly respected and controversial value investor and behavioural analyst, James Montier explains how value investing is the only tried and tested method of delivering sustainable long-term returns.

James shows you why everything you learnt at business school is wrong; how to think properly about valuation and risk; how to avoid the dangers of growth investing; how to be a contrarian; how to short stocks; how to avoid value traps; how to hedge ignorance using cheap insurance. Crucially he also gives real time examples of the principles outlined in the context of the 2008/09 financial crisis.

In this book James shares his tried and tested techniques and provides the latest and most cutting edge tools you will need to deploy the value approach successfully.

It provides you with the tools to start thinking in a different fashion about the way in which you invest, introducing the ways of over-riding the emotional distractions that will bedevil the pursuit of a value approach and ultimately think and act differently from the herd.

English

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 strategist in the annual extel survey for most of the last decade. He is also the author of three other books – Behavioural Finance (2000, Wiley), Behavioural Investing (2007, Wiley) and The Little Book of Behavioral Investing (Forthcoming, Wiley). 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 a visiting fellow at the University of Durham and a fellow of the Royal Society of Arts. He has been described as a maverick, an iconoclast, an enfant terrible by the press.

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Preface xi

Foreword xvii

PART I WHY EVERYTHING YOU LEARNED IN BUSINESS SCHOOL IS WRONG 1

1 Six Impossible Things before Breakfast, or, How EMH has Damaged our Industry 3

2 CAPM is Crap 19

3 Pseudoscience and Finance: The Tyranny of Numbers and the Fallacy of Safety 29

4 TheDangers of Diversification and Evils of theRelativePerformance Derby 39

5 The Dangers of DCF 47

6 Is Value Really Riskier than Growth? Dream On 57

7 Deflation, Depressions and Value 65

PART II THE BEHAVIOURAL FOUNDATIONS OF VALUE INVESTING 73

8 Learn to Love Your Dogs, or, Overpaying for the Hope of Growth (Again!) 75

9 Placebos, Booze and Glamour Stocks 85

10 Tears before Bedtime 93

11 Clear and Present Danger: The Trinity of Risk 105

12 Maximum Pessimism, Profit Warnings and the Heat of the Moment 113

13 The Psychology of Bear Markets 121

14 The Behavioural Stumbling Blocks to Value Investing 129

PART III THE PHILOSOPHY OF VALUE INVESTING 141

15 The Tao of Investing: The Ten Tenets of My Investment Creed 143

16 Process not Outcomes: Gambling, Sport and Investment! 165

17 Beware of Action Man 173

18 The Bullish Bias and the Need for Scepticism. Or, Am I Clinically Depressed? 181

19 Keep it Simple, Stupid 195

20 Confused Contrarians and Dark Days for Deep Value 205

PART IV THE EMPIRICAL EVIDENCE 215

21 Going Global: Value Investing without Boundaries 217

22 Graham’s Net-Nets: Outdated or Outstanding? 229

PART V THE ‘DARK SIDE’ OF VALUE INVESTING: SHORT SELLING 237

23 Grimm’s Fairy Tales of Investing 239

24 Joining the Dark Side: Pirates, Spies and Short Sellers 247

25 Cooking the Books, or, More Sailing Under the Black Flag 259

26 Bad Business: Thoughts on Fundamental Shorting and Value Traps 265

PART VI REAL-TIME VALUE INVESTING 279

27 Overpaying for the Hope of Growth: The Case Against EmergingMarkets 281

28 Financials: Opportunity or Value Trap? 291

29 Bonds: Speculation not Investment 299

30 Asset Fire Sales, Depression and Dividends 309

31 Cyclicals, Value Traps, Margins of Safety and Earnings Power 315

32 The Road to Revulsion and the Creation of Value 325

33 Revulsion and Valuation 343

34 Buy When it’s Cheap – If Not Then, When? 355

35 Roadmap to Inflation and Sources of Cheap Insurance 361

36 Value Investors versus Hard-Core Bears: The Valuation Debate 371

References 379

Index 383

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