Hideous Opportunity Sets and Foie Gras Markets: Observations from James Montier

By
James Montier

The CFA Institute European Investment Conference is a focused, interactive conference for Europe’s leading investment professionals. The 2017 CFA Institute European Investment Conference will bring portfolio managers, analysts, chief investment officers, and CEOs together in Berlin on 16–17 November.

James Montier, a member of GMO’s asset allocation team, is a value investor who uses behavioral finance insights to guide his investment strategy. His observations on financial markets — including the “Seven Immutable Laws of Investing” that he has applied to analyze markets around the world — combine vivid imagery with blunt commentary on investor behavior. The markets have given him a lot to talk about:

  • Foie Gras Markets: In a January 2014 interview with Robert Huebscher, Montier described the challenges of building a portfolio in an environment where bond returns are unattractive and cash is generating negative returns. Montier said that the challenge lies in finding investments that offer a margin of safety when investors are “stuck in this kind of foie gras market where you’re being force-fed risk assets” by central banks.

  • Reverse Decoupling Theory: In a March 2014 discussion with Mark Dittli, CFA, and Gregor Mast, Montier said that in the past, the decoupling theory has led investors to expect emerging markets to be unaffected by economic slumps in developed markets. Montier now observes investors embracing a “reverse decoupling theory” — that is, the theory that developed markets will resist emerging market downturns. “Neither of these assumptions is true,” Montier said. “I don’t think decoupling can happen in either direction.”

  • Overrated Bubble Hunting: In his Huebscher interview, Montier noted that investors don’t need to believe in equity market bubbles to realize that they’ll get low returns from assets that are overpriced. Montier acknowledged that “the use of bubble methodology is certainly not to be underestimated,” but he also warned that “people use the term too loosely and it can lead to unhelpful assessments.”

  • A Hideous Opportunity Set: In March, Montier said that central bank policies around the world have driven “the returns on all assets down to zero, pushing everybody out on the risk curve.” As a result, Montier said that “what we see is a hideous opportunity set.” In absolute terms, Montier finds that “nothing is cheap” and that “as an investor, you have to stick with the best of a bad bunch.”

  • A Perfect Dry-Powder Asset: In his discussion of foie gras markets, Montier recommended that investors “create a perfect dry-powder asset” to hold until the investment environment changes. According to Montier, there are three characteristics of a perfect dry-powder asset: “It would give you liquidity, protect you against inflation and it might generate a little bit of return.”

In October 2014, Montier spoke at the CFA Institute European Investment Conference in London and delivered the closing keynote address. His presentation, “Shareholder Value Maximization: The World’s Dumbest Idea?” was discussed in detail on the European Investment Conference blog.

For an extensive list of Montier’s insights, visit the James Montier resource page maintained by Tim du Toit.

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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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