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James Montier, Reasons (NOT) To Be Cheerful

Mr. Montier is a senior member of GMO's asset allocation team. He also looks like he hangs out with Guy Fieri, the Diners, Drive-ins and Dives guys.
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Mr. Montier is English and believes the behavior of the US stock market of late is "absurd." Here's an excerpt from his August 12, 2020 letter, for what interest it holds.

David

- - - - -

Never before have I seen a market so highly valued in the face of overwhelming uncertainty. Yet today the U.S. stock market stands at nosebleed-inducing levels of multiple, whilst the fundamentals seem more uncertain than ever before. It is as if Mr. Market is taking a tail risk (albeit a good one) and pricing it with certainty.

Now let me be clear, I don’t claim to know the answers to any of the deep imponderables that face the world today. I have no idea what the shape of the recovery will be, I have no idea how easy it will be to get all the unemployed back to work. I have no idea if we will see a second wave of Covid-19 or what we will do if we do encounter such an event. But I do know that these questions exist. And that means I should demand a margin of safety – wriggle room for bad outcomes if you like. Mr. Market clearly does not share my view.

Investing is always about making decisions under a cloud of uncertainty. It is how one deals with the uncertainty that distinguishes the long-term value-based investor from the rest. Rather than acting as if the uncertainty doesn’t exist (the current fad), the value investor embraces it and demands a margin of safety to reflect the unknown. There is no margin of safety in the pricing of U.S. stocks today. Voltaire observed, “Doubt is not a pleasant condition, but certainty is absurd.” The U.S. stock market appears to be absurd.

Comments

  • As longs as we have back stop from the FEDs, we are fine. If market goes down by 2-4% in a day or two, they will be touting the initiative they are taking (unlimited QE) and the market will go up. I don't know what it will take the 'experts' like James to accept this.
    We are having such a NICE recovery against all the odds since hitting the kilter in Mar.
  • I really wonder who this "we" is that is having such a NICE recovery.

    Would that be all of the people who have lost their employment? The people who are being thrown out of their homes into the streets? The small business owners who have lost their hard-built businesses and are going bankrupt? The heroic health workers who are working their butts off to save the lives of the fools who demand their "right" to not wear a mask?

    Or maybe the people who have contracted the coronavirus and are damaged for the rest of their lives? For sure not the people who died needlessly because of the pathetic non-response of the federal government.

    Yes, this is certainly a NICE recovery.
  • Hi @Old_Joe

    Those statements 'bout cover most of the bases.

    And all of the smallest ramifications that continue to tweak and alter daily events for many people.
    My list is smaller than many; but I and family encounter little road blocks in many places several times a week.

    I.E. : Should one's 95 year old, very healthy mother skip a 6 month dental cleaning; wondering and hoping no one in the office unknowingly has Covid.

    Yes, DAMN; it is !!!
  • edited August 2020
    his is one of so many expert voices saying the same puzzled things
  • edited August 2020
    Here is the problem with the GMO team. They are wrong for years. The SP500 made over 10% more than what they predicted at the end of 2010 for the next 7 years. It is not that clear but the first green bar says that US large cap will do 0.4% + 2.5% inflation = 2.9% average annually in the next 7 years...or...EM will do 4.1+2.5=6.6 but they lagged US LC. GMO have been saying that EM will be better than US for 10 years already.

    You can see in this (link) what SPY did vs EEM from 12-31-2010 in the next 7 years.

    (imageimageimage)
    But they are not alone. Arnott models didn't work either and why PAUIX made under 2% annually for 10 years.
    Gundlach, the bond king, predicted in 2018 that the 10 year Treasury will be at 6% in 2021.

    And it's not the only thing: over the last 10 years we heard that
    inflation must be high.
    Valuations are ridiculous.
    Inverted yield means recession.

    So, what is the reason why markets are up and the prediction are off? When the Fed interfere models, history and prediction can be off by years?

    Sure, one day some predictions will true, after all, if you predict things for years, eventually you will be right.
  • Retail sales last month were above their pre-pandemic level, despite out of control pandemic. I guess if Trump will accept the gift Pelosi is offering and keep the stimulus coming, the stock market may start to look cheap.
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