Montier: Seven Immutable Laws of Investing
By Barry Ritholtz - March 9th, 2011, 10:30AM
Don’t-walk-run to read GMO’s James Montier Seven Immutable Laws of Investing:
1. Always insist on a margin of safety
2. This time is never different
3. Be patient and wait for the fat pitch
4. Be contrarian
5. Risk is the permanent loss of capital, never a number
6. Be leery of leverage
7. Never invest in something you don’t understand
The full post is found at GMO’s site.
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Previously:
A Better Sentiment Measure: DrKW’s Fear & Greed Index (February 2006)
James Montier Resource Page (July 2010)
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March 9th, 2011 at 10:56 am
Almost sounds like he stole these ideas from Buffet, especially #7.
March 9th, 2011 at 11:26 am
I read this last night and while there is not much new to the rules (or should not be to an experienced investor) it is a very useful piece. It is not just his rules that are of value. His analysis that there is no asset class that is a good buy at these prices is, I’m afraid, bang on. I have been looking for somewhere to park money lately and can’t find anything. I have been taking on more risk and getting a good return but I am losing my taste for that of late. Time to go to cash. Right now the markets are a bigger worry than the economy.
March 9th, 2011 at 11:36 am
“Never invest in something you don’t understand”
as TerryC mentioned- that’s Buffet’s hard and fast rule- outside of his 1st Rule of course (don’t lose money)
March 9th, 2011 at 12:21 pm
Nonsense, just follow the CNBC’s … er… uh… the ABC’s of “investing.”
March 9th, 2011 at 12:22 pm
“…His analysis that there is no asset class that is a good buy at these prices is, I’m afraid, bang on…”
peep should take note..
is there, really, a ‘Sector’ that is “out of favor” ?
Puts are, still, inexpensive..
March 9th, 2011 at 12:30 pm
Sometimes this time is different.
Previous oil shocks were reversible political events. I fear that this time is different as it is an irreversible geological event. The 1000% rise in the price of crude oil over the last 10 years seems to corroborate this belief.
A currency crisis resulting in the loss of reserve status for the USD and/or a redefinition of the USD would certainly be different from anything I have experienced… although you could argue it’s no different than what has eventually happened to all fiat currencies.
March 9th, 2011 at 1:47 pm
Weird coincidence. I was searching for the difference between trading and investing earlier today and came across this list. Some of my students had a hard time understanding what makes trading and investing two different things. Frankly, I have not found a good definition. Like Justice Stewart on porn, I think you know it when you do it.
But I don’t necessarily agree with number four. Trading against the trend is suicidal unless you have balls of steel and very deep pockets. I think the contrarian advice is overused and based on a few exceptions. It’s like telling people they should buy lots of lottery tickets because a few people won millions. A few will become very rich being contrarian, but most will lose.
March 9th, 2011 at 1:59 pm
It’s so easy to say these things but so difficult to put them into practice.
For example, real estate/housing is a contrarian investment now. There are some “fat pitches” available in real estate compared to a few years ago. If it’s not different this time, real estate will soon recover and begin appreciating.
So does that mean smart money should be investing in real estate?
March 9th, 2011 at 3:14 pm
socaljoe,
see some of..
http://search.yippy.com/search?input-form=clusty-simple&v%3Asources=webplus&v%3Aproject=clusty&query=Williston+Basin+Bakken+
& http://pubs.usgs.gov/fs/2005/3043/ for beginners..
“Peak Oil” is a Political, not Geologic, construct..
March 9th, 2011 at 3:55 pm
Expat Says:
March 9th, 2011 at 1:47 pm
I was searching for the difference between trading and investing earlier today and came across this list. Some of my students had a hard time understanding what makes trading and investing two different things.
reply:
———-
If you buy with the intention of getting back your initial investment, then you are investing. Example: a house to live in. Your use of the house is consumption but the investment portion subsidizes the consumption.
If you buy to use something, you are consuming.
If you buy anything else, you are trading. If you buy without a plan to sell before you buy, you are subsidizing somebody else.
If you buy without a plan, pray you are lucky.
March 9th, 2011 at 3:57 pm
You are right about peak oil, Mark. I’ve been a petroleum geologist for 30 years. Reserves are usually dependent on price. The higher the price, the more oil companies have incentive to search in wilder basins or offshore. We have also done a lot of work in secondary and tertiary recovery. They say here in West Texas that the Spraberry Formation is the world’s largest subeconomic oil giant. It has been producing for 60 years, and companies to this day can’t drill wells fast enough in it.
The only thing holding back most oil companies (and in the US, most oil and gas is produced by small to medium sized independents, NOT “Big Oil”) is government holding back acreage everywhere: offshore, Alaska, and on Federal lands in the west.
March 9th, 2011 at 4:26 pm
Mark E Hoffer Says:
March 9th, 2011 at 3:14 pm
“Peak Oil” is a Political, not Geologic, construct
reply:
———–
Agree. I’m not educated like the other poster who replied to you, but common sense and observation supports your statement. I was a peak oil believer for a while, but got over it. Now, it just makes me think that oil services is a good place to invest. Also, I came to believe that oil will only rise to the point it becomes irritating, not suffocating. People are smart. They will become as innovative as they need to live affordably. If the masses really wanted cheap energy now, they would have it due to massive investment that would allow smart people to figure it out. Inventions will always appear when they are needed and useful, although economic discontinuity will also appear during times of transition.
March 9th, 2011 at 5:53 pm
@dead hobo:
You are right. Common sense (and the laws of economics and thermodynamics) usually rule the day. In the mid 1930′s, Hilter had lots of coal and not much oil. He new war was coming in the near future, so he lined up his chemists (the best in the world then, and possibly still today) and told them he wanted oil “or else”:. They gave him oil from coal.
March 9th, 2011 at 9:15 pm
How can “peak oil” be a political event? If it were, politicians could simply allow more more oil production… in which case it would not be “peak oil” after all. It’s self-contradictory.
March 9th, 2011 at 9:42 pm
Terrific piece and if you remember only one, remember the easiest to execute – “wait for the fat pitch.”
March 10th, 2011 at 12:23 am
socaljoe, I’ve got two words for you:
Brilliant!
March 10th, 2011 at 5:42 am
B.R.
It seems you wear two hats, a technical and a fundamental one. When I read or hear your bullish arguments they seem more technical in nature and the bearish ones are fundamental. Here you post GMO which I consider one of your better sources(my own view is technical analysis is akin to reading tea leaves) where the argument that stocks should be bought because bonds are less attractive is beautifully trashed via allegory.
What concerns me about your calls based on technical reasons is that these can turn on a dime and it’s just not possible for everyone to head to the exits on time. Both GMO Capital & Hussman Funds both recognize the extreme over-valuation of today’s markets. Buying based on technical reasons for a few months of potential seems like an awfully bad risk adjusted trade, especially for the retail investor who can’t move that fast.
~~~
BR: The reason we named the firm Fusion is that we combine macro, fundamentals, technicals, valuation and trend into one approach — they are ‘fused.”
Yes, technicals, which are driven by prices and volume, can shift much more rapidly than fundamentals, which key off of quarterly earnings.
March 10th, 2011 at 8:00 am
I would submit rule number 8: Just because it worked today is no guarantee that it will work tomorrow. While on the surface this may seem counter to rule 2 (this time is never different), far too often over-confidence gets in the way in making investment decisions without a full understanding of the risk involved.
March 10th, 2011 at 11:56 am
Isn’t it ironic that James Montier of GMO, with rule #2, disagrees with Jeremy Grantham of GMO with respect crude oil being the only bubble to not have corrected… thereby representing an instance where “it different this time”. Grantham has written in an excellent paper last summer, that he believes this to be due to resource depletion.