s
Global strategySpecial report
22 January 2009
A collection of Mind Matters from 2008
Postcards
from the edge
© Getty Images/Mark Hooger
James Montier
Please see page 207
(44) 20 7762 5872
important disclosures
james.montier@sgcib.com
www.sgresearch.socgen.com
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Postcards from the edge
22 January 20092
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Postcards from the edge
22 January 20093
Postcards from the edge
The notes I
ve collected here represent my
market relevant
output from the last 12 months (Ihave omitted the notes on more behavioural matters in general
don
t worry I have otherplans for those). The aim is not to say I told you so, but rather to illustrate that a long-termvalue orientated process driven approach to investing works.
The role of process
The first two notes in the collection lay out the foundations of my approach, as close to aninvestment methodology as I
ve written. The first note argues that process is the one thingthat an investor can control. However, process often takes a backseat as many investorssuffer outcome bias (a situation where the quality of a decision is judged by the outcome,effectively ex post, rather than from the more accurate perspective of ex ante). Obsessingabout things we can
t control (like outcomes) is both draining and futile.
The principles of investment
Having established the importance of process, the second note tries to lay out some of theprinciples that underlie my approach and hence drive and unify the analysis in the rest of thecollection. In essence the approach I use has three elements:
Don’t forecast
As JK Galbraith said
we have two classes of forecasters: those who don
t know
and thosewho don
t know they don
t know
. Or, as Keynes opined
it would be foolish, in forming ourexpectations, to attach great weight to matters which are very uncertain. It is reasonable,therefore, to be guided to a considerable degree by the facts
.I have long preferred analysis to forecasting. As Ben Graham said
analysis connotes thecareful study of available facts with the attempt to draw conclusions therefrom based onestablished principles and sound logic
. Hopefully this collection will show that it is possible toinvest without relying upon the folly of forecasting.
Margin of safety is key/value is everything
At the heart of the approach I follow is the belief that the price I pay for an investmentdetermines the likely return. No firm is so good as to be immune from the possibility ofovervaluation, and few firms are so bad as to be exempt from the possibility of undervaluation.Thus a firm can be an investment at one price but not at another.Of course, any given estimate
1
of intrinsic value will only be correct via the intervention ofgood luck. Hence, buying only when a large discount to that estimate is available offersprotection against being wrong
effectively a margin of safety. As Graham said
it is availablefor absorbing the effect of miscalculations or worse-than-average luck
.It has long struck me that the value approach is perhaps the only
safety first
method ofinvesting I have come across. It is the only form of risk management which makes any senseto me, as it places
value risk
at its core. To my mind, buying a stock that has been badlybeaten up, and is now cheap suggests that expectations are low, effectively the value risk is
1
not a forecast
see the chapter on maximum pessimism for details
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