James Montier shines light on the “The flaws of finance”

James Montier is a member of the asset allocation team at GMO UK Ltd. Previously, he was co-head of global strategy at Société Générale S.A. and a global equity strategist at Dresdner Kleinwort. Mr. Montier is the author of several books, including Behavioural Investing, Value Investing, and Behavioural Finance. He is a visiting fellow at Durham University and a fellow of the Royal Society of Arts. Mr. Montier holds a BA in economics from the University of Portsmouth and an MSc in economics from the University of Warwick.

He gave a useful presentation at the CFA Institute’s Annual Conference this week where he systematically reveals the dangerous nonsense underpinning modern portfolio theory so widely followed in finance today.

Here is a direct link to the clip. You will need to advance the play bar to 18:40 to where Montier is introduced.

There are many gems in his talk–such a refreshing relief to hear someone call bullshit rubbish on conventional wisdom in this area.  (I gave a similar talk at the CFA Institute Conference in Atlanta in 2008.  It was well received, and completely unheeded by the industry, of course.)  Existing business models in the money industry are so flawed, endemic and misguided that it is very slow to evolve changes needed.  And so the firms, advisors and clients will apparently keep learning hard lessons the hard way for a few more years to come.

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4 Responses to James Montier shines light on the “The flaws of finance”

  1. Barry says:

    James Montier succinctly sums up what this investor needs to question before a single farthing is rendered into stocks – Is the dividend yield sustainable and will the dividend grow? Is the low P/E multiple a signal of misguided valuation by Mr. Market? Will earnings grow? And, I will add, “What are the liabilities?”

  2. Phillip Cocks says:

    The Turkeys were surprised, when their heads were cut off … :))

  3. aliencaffeine says:

    All of the talking heads, including one Bob Brinker, stating that the old mantra SELL IN MAY, GO AWAY (get the beachhouse locked in, summers on its way) and DON’T BE SEEN, UNTIL HALLOWEEN is hogwash, rubbish, old hat, proven by statistics to be unreliable yada yada yada.

    Well guess what? With the global boomer set for their supposed retirement years selling in May and STAYING AWAY might be good advice. Let the markets guide you with price/volume action. Maybe, just maybe the boomer money shoveling phase into the markets is slowing down, and reversing. Yes REVERSING. You need to ask yourself. If Mr/Ms Boomer are pulling the money out of the markets into cash/cash equivalents, where is the Cowboy Capitalists out there, the 20-30-40 somethings going to grow their nest eggs? Out of the cracked yolks of wounded boomer eggs?

    Yesterday I cancelled the membership at the local YMCA which I had for a decade plus. Reason: I needed the ever-increasing monthly membership fee to pay for the increased real estate taxes. The director was silent and definitely not pleased to see my money go. Not me, but my monthly bank draw get CANCELLED. And you know what? Walking around the neighborhood suits me just fine. I come from modest means, and my freedom means everything. And I know what a leaky bucket can do with ZIRP-ZIP hocus-pocus, Bernank-monkey business going on.

    STARVE THE BEAST.

  4. Much of Montier’s talk focused on VaR (Value at Risk), the model accredited to/blamed on JP Morgan. My understanding of VaR (and I don’t prevent to be an expert on it) is that it was fundamentally little more than a way for the banks to technically off-load risk from their books so they could lever up even more so than before. In other words, it was a way for them to goose profits and bonuses.

    It’s always instructive to learn from our mistakes. But VaR was developed in the early ’90s. How many people, including Mr. Montier were warning about the potential consequences back then?

    You know, if you look back into the history of finance and banking, you’ll find we’ve dealt with all the same issues before. The names may change, and the specifics may be tuned differently, but financial innovations are as old as civilization. Yet, all too often, we seem to forget the mistakes of the past. And you know what that means.

    Actually, I do recall a report on 60 minutes back in the early ’90s in which some did warn about the destructive potential of derivatives, particularly credit derivatives. Yet these instruments, which would later be deemed “toxic assets”, were allowed to flourish throughout the shadow banking system like weeds on an a poorly maintained lawn. Until the only solution is burn the lawn.

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