James Montier on Fear and Investment (Podcast)

is currently on the asset allocation team at GMO. And I know James in passing for many years and I have been chasing him down to come into the studio to record one of our little chats, and he is so difficult to pin down. He is located in the hinterlands of the UK. He's not even in London. He's hiding in an undisclosed location north of UH, north of the city UH. And he is in and out of Boston and New York so frequently it's tough to grab him.

But since we're all sheltering in place and he has nowhere to go, I was able to pin him down for the better part of an hour and got to ask him about half of the questions I want to UH. James is really a fascinating thinker. UH. He describes that as his job. He gets paid to sit and think about the difficult questions that other people don't want to

think about. He also has written pretty extensively, not only about behavioral investing in finance, but about some of the challenges of being a value investor and looking at markets from a perspective of having a margin of safety. Regardless, you will find this to be an absolutely fascinating conversation. He is a really thoughtful, intriguing guy and he did not hold back at all. So, with no further ado, my conversation with GMOs James Montier vis his Master's Business

with Barry Ridholts on Bloomberg Radio. My extra special guest this week is James Montier. He is a member of the investment committee for GMO, the famed investment farm headed by Jeremy Grantham. Previously, he worked at Dressner as well as Society General as a market strategist. He has an ardent reputation on Wall Street. He has been named Best Strategist a number of years and has a reputation as

both a bear and a value manager. James Montier, Welcome to a Shelter in Place edition of Masters in Business. Thank you very much, Barry to delight to be here. Let's talk a little bit about your current gig. You're working at GMO, where you've been for a couple of years, but before you started at GMO, you were at Society General. Uh,

tell us a little bit about your role there. Sure. So, I've done a lot of things over the years, and incredibly I've been at GMO for for over a decade now, which is is startling, um and testament to how time flies when you're actually enjoying yourself. Um. So what I do the GMO is is essentially asked the questions that people don't want to be asked. My finally found a

job that I am perfectly suited for. My job is to think about all the places we could be wrong, um, whether that's in in kind of the micro level or indeed at the macro level. So I spend all of my time worrying about what the models are missing, um for part of my job. And then the other part of my job is is really something to the table

when when things get cheap. So when I joined GMO, jeremy terms and said to me, look, one of the things that we really want you to do is when you think things are cheap, really really scream and shout and make sure that we're not missing out. I've only had to do that a couple of times, which is a sad refle action on the state of the markets that I've I've had to sit through for the last decade or so. Um, but it is. It's a kind

of perfect job. There are essentially two jobs at GMO you would love and one that you you really wouldn't want. The two that you would love the one that that Jeremy has as as chief strategist. I'm the one that I have, which is effectively minister without portfolio. The one you really wouldn't want to have is is poor old Ben ben into the head of our allocation because he gets to sit there and has to kind of listen to Jeremy and listen to me and then try and

build that into a real portfolio. So his is the job you definitely wouldn't want. Mine is a is a pretty sweet gig. So part of your description is to pound the table when things get cheap. Markets just dropped thirty five percent last month. Was there any table pounding going on at GMO? Where did they not get cheap enough that there there was there wasn't decent table pounding going on. I was being very very excited about particularly

non US based equities. The US didn't get cheap enough for my particular brand of value, but emerging markets were looking really really cheap, and a lot of the international markets Europe was was looking pretty pretty damned exciting as well.

So there was a fair amount of table pounding, and hence the reason why I actually put pen to paper a couple of weeks ago and wrote a piece on fear and the psychology of bear markets to to try and galvanize people to to action, because it struck me that this was one of those opportunities where where prices and fundamentals were potentially getting dislocated. So let's talk about

the prior time prices really got cheap. You and your partner over at sak Gen and Dressner, Albert Edwards, were famously bearish heading into the YO eight or nine crisis. Were you looking at that had made you that negative on equities prior to the Great Financial Crisis? So I think from from our perspective, there were a kind of number of events that were going on the really kind of triggered our caution. But the most obvious one was kind of the immense housing bubble the we've been talking

about for in fairness a couple of years before the GFC. So, as usual with most of my work, I find it's it's best to read it, then put in a drawer and forget about it for two years, and then take it out and actually act on it UM because it seems to take about that long for for my my

sense of timing to come good. But it was it was really the housing market and the economic imbalances that were so um obvious to anyone who kind of studied the flow of funds, who looked at the sectoral balances for the us UM, there there were just such obvious glaring um imbalanced is that that were unsustainable UM. And as ever, an unsustainable process can't go on forever, but

it generally goes on for longer than one imagines. And that was one of the things that we were really battling with UM was was the kind of when, and it is every time when when we get bearish, it's the the when is always the problem. But the economic imbalances were just so marked, but it was it was

hard not to be bearish. Coupled that with what was a pretty damned expensive market on the simple Chiller style valuation as cycnically a justice fee, and it led us to be yeah, as bearish as as I think we've probably ever been. Yeah, that that timing issue is always problematic because, as we've seen over various cycles, expensive stocks can get much more expensive and cheap stocks can get much cheaper. Is it really just a two year lag?

How do you deal with I guess we could call that the momentum issue when you're looking at either cheap or prices stocks. Yeah, it's it is. It is a momentum issue. You're absolutely right, And it is both momentum in terms of the movement of prices and also momentum in terms of the underlying economics of the situation as well on occasion. And I think the way I've been forced to reconcile it is to say, look, I simply don't know. I never know when something is going to

to unravel. Um. I can often see the the unsustainable nature of what is happening, but it doesn't tell me anything about timing. And I think that's one of the things that that really harks back to some of the writings of Ben Graham Ben Graham said there were two ways of thinking about investing in the market, the way of timing and the way of pricing UM. And the way of timing was trying to effectively guess what was going to happen UM. And that is essentially next to

impossible as far as I can concerned. I think there are potentially people who can do it. I just know that I am definitely not one of them. UM. And on the other hand, there is the way of pricing. And on the way of pricing, you you simply follow the rules of valuation. Now, if you're going to do that, you're going to need to have a long time horizon, and that is one of the most important, if not the most important colory of being a value based investor

is you're going to have to be long term. And the problem is, of course, as we well know, everybody starts off as a long term investor, but as soon as they hit a patch of poor performance, they become rather too short term UM. And that is why I think so many people struggle with the whole staying true to being a value based investor over any length of time. Sounds like the Mike Tyson quote everybody has a plan

until they get punched in the face. You're saying, right, exactly plans of of investors work great until there's a little volatility in turbulence like we've seen earlier this year. Exactly right. It's it's precisely that. It's it's easy to have a plan, UM. It's the discipline of sticking to that plan. And it's one of the reasons that I enjoy my time at GMO so much is because we have a discipline. We have a series of valuation based forecasts that help us anchor UM and in psychologies, you know,

I have a great interest in psychology. UM. There is an expression which is if you cannot d buy us, then re buy used. And what that really means is it's incredibly hard to stop people being people. UM. It

is our very nature. So instead of trying to stop them being UM people, the best thing to do is to try and, knowing that they're going to fall into these behavioral pitforces, to design a process that will actually allow them to UM benefit from those same behavior pitface is kind of like nudge if you like UM, and and the way that we do it is to have that valuation discipline. So when the world is falling apart.

Our value models are all else being equal, going to be saying, hey, look things are getting cheap, you should be buying UM. Now we are just as much human as everybody else. And I'd like to sit around and go, well, you know what, owen the models know what? What? You know? Why? What happens if the world does end tomorrow? That kind of thing. But having that conversations at least step in

the right direction and seeing those numbers. When you're seeing you have double digit rates of prospective return UM, you have to be really, really sure that you know something the model doesn't in order to override it. Let's talk about behavior and valuation. I love this quote of yours. Leaving the trees could have been our first mistake. Our minds are suited to solving problems related to our survival rather than being optimized for investing decisions. Explain that if

you would. Of course, so, I think it's it's kind of important that we acknowledge that we are the way we are because of the solution UM evolution has has designed us to work. But evolution is in essence a glacial process. It does not reflect the world we live in. UM you know, we are really designed for the African savannah of a hundred and fifty thou years ago, not certainly the industrial age of a hundred years ago, let alone the information age in which we find ourselves drowning today.

So I think that the brain is a product of those same evolutionary forces that have designed us in every other regard, and that means our brains are not well adapted to the problems we're trying to solve. And so if we think about fear is a really good example of this um in evolutionary terms. The cost of getting it wrong is is pretty terrible. So if you see a twig and you think it's a snake, that's fine, right, you stepped out the way, you took a slightly wider path,

but it was fine. Get that wrong, and the downside is its potentially pretty pretty terrible. If you think it was a twig, in your step on it, it turns out as a snake and it bites you. You You are evolutionary toe um. And so the brain is is designed to work in a certain way, and when it comes to fear, is designed to to make very short, quick

decisions that will keep us alive. Now, the problem is that when it comes to investing, and let's say markets are falling, as they obviously have been over the last month or so. UM, then what we're doing is we're triggering out fear response. And there was a wonderful behavior experiment by shivn and some co authors who looked at

the impact of fear on investment decision making. And they set up a really simple game where you've got to choose over twenty rounds each round whether you wanted to invest, and they wanted to see if you suffered a loss in the previous round, would it impact your decision to invest in the next round, And obviously it shouldn't if

you were rational. UM. What they found was for for normal people people like you and I, UM, that actually it did when you lost money in the previous round, they were much much less likely to invest in the next round. That wasn't true for a subset of people they examined, and that subset were very unusual. They had a specific form of brain damage which meant that they

could no longer feel fear. There amigl dala, which is one of the brain center of fear of being irreprotably damaged UM, and so they behaved much more like a model of rationality. They invested irrespective of the outcome in the previous round. So our brains are designed by this process is evolution to work in certain ways that keep us alive but don't give us necessarily the correct outcome when it comes to the world in which we're trying

to think today in investing. So the secret too good investing is really just a modest amount of brain damage. I I'm standing by that, and then I'm pretty sure most of my friends, with the test of that, I can't say, I can't say I disagree with that. So so or or if not brain damage, at least a little bit of behavior control that doesn't look like the typical normal human being and is a little more embracing of risk than our evolutionary history might imply. Absolutely absolutely so.

So let's talk a little bit about how some of these behavioral biases manifest themselves among investors. When I look around the world and I look at some of the areas that you have described as cheap emerging markets Europe elsewhere, especially away from the United States, investors seem to really hate those areas and have voted with their dollars how much of this is a rational response to problems in em and problems in Europe, and how much of this

is just being too fearful for attractively priced stocks. Yeah, that is the the the pertinent and peronnial question that one has to ask, um. And the answer is we we can never be sure, or at least anyone who says that's sure is is probably a liar or a fall or some linear combination of the two, because you can't know, And so all you can do is say, have I got sufficient margin of safety? And it goes

back to good old Ben Graham. Um. I know I sound like a broaden record always quoting Ben Graham, but to me, he really is one of the most insightful of histories examples of great investors, because he always said you have to operate with the margin of safety, because you know that if you're dealing with something like them. Yes, they have much legal standards, much poor report corporate governance than than say the US does, but we all know that,

and that's already in the price. And so if those things then look really cheap, you're like, well, look, let's take gas from as an example, the Russian energy company. It trades on a pee of about two times, which is clearly ludicrous. Nobody thinks gas From is worth two. It's either worth zero because Putin thinks it belongs to him, or it's worth a lot more than two. But it trades on two um. And you're like, well, look, I am being paid a lot to take on that risk.

Now push comes to shove, I will probably lose because Putin owns tanks and I own bits of paper, and his tanks will trump my bits of paper. But in every year that I get that carry on on gas From, it's paying out a dividend yield of six seven percent um. That's a very nice return for taking that degree of risk um every year without any worry about anything else.

And ultimately, you know, as long as you size a position like that appropriately, I think it just makes a great deal of sense because your marginal safety is so high. So what are the credible reasons for this ongoing gap and valuations between a country like the United States that arguably still has the rule of law and countries like Russia that have been described as you know, a criminal

organization with a standing army. How can an investor confidently put money at risk in a place like China, like Russia, where you never know how the rules are going to change from quarter to quarter, a month to month. It's it that is, and that is why they trade cheap, right. You're absolutely right. You You you have a lower degree of confidence, and you have to scale your positions appropriately so you you don't put everything in to rush. He

don't put everything into China. You build a diversified portfolio across any number of countries ranging from the ones with the greatest corporate governance risk China and Russia, up to two places that have considerably less Taiwan career. Um. They're not perfect by any means, but you are being compensated an awful lot for the risks involved right now. At least not always the case, but right now, that is the the the return you are getting I think way

outweighs the risks you are undertaking. Um. And so to me, the arithmetic of the situation says, look size and appropriately and invest with a degree of confidence. Um. But acknowledge the fact that yes, you are taking on more risks and therefore you you want that greater return. That's why these things are priced at a discount, even on the

normal times. Now right now, that discount is way wider than normal times, So your margin of safety is is much greater than than average, which is why these things to me look very attractive. So so, speaking of that giant spread between EM and developed nations, especially the US, I'm assuming you're predicating some of this on the concept of mean reversion, that eventually stocks that are expensive will come down in price, stocks that are cheap will rise

in price, and things will revert to normal. But we've seen like a decade of EM underperforming the US. Are you counting on mean reversion to to shift this or is something more fundamental happening that's kept this spread as wide as it's been for as long as it's been. Well, it's it's exactly the debate that we have had internally. Interestingly, the strangely enough, given how wrong we have been on the U s UM, it is certainly the question that we have spent an inordinate amount of time trying to

understand is how how could we be wrong? What could stop mean reversion? What are what are the rational reasons for the US having such a premium valuation relative to the rest of the world. UM And unfortunately, when when we've done that. I've personally, I have found most of the explanations to be very wanting. UM. So you know, one of the most common ones, low interest rates, just doesn't cut the mustard on on multiple different levels. First,

there is no provable relationship between interest rates and valuation. Uh. Second, there are any number of other countries that have low interest rates Europe, Japan for forever um, yet they haven't enjoyed high multiples UM. So you you you automatically begin to question the sanity of that statement, the low rates of the justification for high multiples. I think the one where I have perhaps the most sympathy, but still not I don't find overwhelmingly compelling is that the US has

um higher quality companies UM. And I think that is in essence true. There are some exceptional businesses that happened to be domiciled in the US, but I simply don't think it justifies the degree of the premium that we witness UM and so I come down still on the side of mean reversion. Yes, it's it's taken a long time, and that's how you end up with cheap markets, right or expensive markets is if they go on for a

long time. And Rudy Dawn Bush always used to say, these things go on for longer than you expect and then end faster than you expects. Um. And they've certainly fulfilled the first part of that over over the last decade, where emerging has got cheaper and cheaper and the US has become more and more expensive. UM. So certainly are our faith has been well and truly tested. But as of yet, I haven't found a compelling, sensible explanation that

explains that differential. I think it was at Sajen you pend a piece that I've always really liked called the Seven Immutable Laws of Investing. That that's got to be at least a decade old, right, that one was? Yeah, I think I wrote that for GMO. Actually, so it's about a decade old. Tell us how you assembled that list. It's a nice run of severn different bullet points. Will will go over some of them. But what was the

process like of putting that list together? It was it was really an exercise in in trying to distill um the experience of myself and many others um into something that was easily digestible. Uh and uh as I realized as I described that I've committed one of the sins I hate, which is kind of the great dumming down of everything. The reduction of anything important to two D

forty characters drives me to distraction. And I suddenly struck that the Seven Immutable Laws was an attempt to do exactly that, which is somewhat embarrassing, But it was really about trying to distill the wisdom of a great deal of UM investors past who I had respected, Ben Graham, John Maynard, Kane's Sir John Templeton, Warren Buffett, obviously numerous others UM, and and really come down to a list of things that I would help to be always true UM that if I had to to kind of pass

this on to my kids without ever being able to talk to them again, what would I tell them were the kind of the rules they had to follow UM in order to to make sensible investment to suck decisions. So you've mentioned always insist on a margin of safety, which I associate with both Ben Graham and Klarman, who had a book of the same name. Let's talk about rule number two, which I'm gonna assume is channeling John Templeton. This time is never different explain the thinking behind that. Right.

So I think that there that was really born out of thinking about our experience of bubbles, and particularly talking with my my former colleague and very good friend Edward Chancellor, who very wonderful book called Devil Takes Behind Most, which is an extraordinary history of speculative mania. UM. And it struck me that looking at his work, looking at Charles Kindelberger's Mania's Panics and crashes, UM, there were an awful lot of similarities to our experience with manias, bubbles and

these kinds of environments. UM. The course, the details are always different, UM. But actually there is a core of rhyming within each of these experiences that is always true. And therefore it was indeed Sir John Templeton who said, um, the the foremost dangerous words is at this time is never different. Probably five most dangerous words invested this time

is never different. Jeremy Grantham takes a slightly different view, UM, and and said, from a value manager's perspective, the most dangerous word UH this time is is is never different in the in the slightly different way. UM. He points out that he we constantly assume mean reversion um. And perhaps that that that can be an error sometimes um, so that they become pretty pretty dangerous. Whereas everybody seems to believe to me that this time is different is

the the usual explanation. So the tech bubble is the prime example. Going through the tech bubble. Oh, you don't understand this time is different because bang bang bang bang bang, um, which it's just it's ever been true. Yet. I didn't understand that shiny phones were going to change the world

back then. Um. In fact they did. The Internet did change the world in ways that I couldn't even begin to imagine, but generally not in a highly profitable fashion um and certainly not the fashion that people were pricing in in So to me, remembering that this time is never different is really just reminding ourselves that human experience is sadly not linear. It has to been more cilical.

Seth Klarman, whose book you mentioned, The March in the Safety, has a wonderful discussion in it about collacterized bond obligations UM during the early nineties, which have unparently uncanny parallels with the experience with collacterized loan obligations in two thousand, two thousand seven, two thousand and eight um, and you you constantly we find that um, these parallels come back um, and Galbraith had a nice expression which was, um, the

world keep coming, and finances the one industry where we keep reinventing the wheel each time in the slightly more unstable fashion, which I kind of like is a summation of most of the kind of problems of finance, but remembering that this time is never different. It is just a reminder that we've seen most of this before. We've seen this movie before. We know how it ends, and

it generally doesn't end well. So the asset classes and the circumstances and the specifics may change from cycle to cycle, but it sounds like human nature itself is immutable, exactly right, precisely. So there's a couple of others that that I like, be patient and wait for the fat pitch. That that sounds like you're channeling Warren Buffets. They're a bit exactly that.

That is definitely a buffet, is the fat pitch. And Ted Williams and had to learn a lot about baseball to understand that one, which is not easy, as you can tell from my accent. Um. But once they got me to hang of it. I said, oh yeah, I get it. Um really about waiting for those good opportunities. You know that there are long amounts of time when doing nothing is the right thing to do. And that's really hard because people expect their investment managers to be active,

to be doing stuff. But there are long periods when there are no fat pitches in which case you shouldn't be doing stuff. Um, don't, don't do something just fit their kind of thing, um And And that can be very hard to to justify, but it allows you to right It allows you to exploit the opportunities when they

do come along. So number four is a real challenge because I'm reminded in the scene, uh from the money Python movie Life of Brian where Brian is speaking to the multitudes and says, you're all individuals, You're all different, and every one of them repeats in unison, we are all individuals, we are all different. And and number four is be a contrarian. How challenging is it to be a contrarian with so much career risk and so much

peer pressure to do what the crowd is doing. Absolutely, and it's really I think the essence of investing um and you can trace that back to to Ben Graham, the Maynard Kanes, Um. They all have quotes. In fact, every good value investor I think has a quote on the importance of being contrarian UM. And one of the contributions I think UM Jeremy Grantham has has really made to our understanding of that is why it is so hard to do. And there are two different sources of

hurdles if you like that we have to overcome. One is is human nature. Human nature tells us that it is warmer and safer in the middle of the herd, and we should probably stay there, um. We don't like

to look different with social animals. And then there is on the other the other set of hurdles are really what one would describe as UM, the institutional imperative, and that's really Kane's observation about career risk, which is obviously it is far better for reputation to fail conventionally than to succeed unconventionally UM. And the combination of those two that that innate human desire to be similar to other people and then the overlay of the institutional framework really

do make it incredibly hard to be a contrarian. But Ultimately, Uh, this is a Templeton quote. If you want different results from other people, you have to do something different from other people. Um. And so we we we end up there saying, Okay, you you just have to be a contrarian. It doesn't mean you have to be a blind contrarian. Doesn't mean you have to be unthinking. I suggest both

to those of foolish. But I think ultimately you have to be prepared to look different if you want to achieve a decent set of investment results, or at least different ones. And that is something that people find incredibly hard to do. So you wrote these in two thousand and eleven. They're published on the GMO side. If you were rewriting this list today, would you change any would

you shift the order around? How has a decade altered your perception of this list of seven immutable laws of investing. I'm kind of glad to say I wouldn't rewrite any of them. Um, I'm glad to say the immutable part is still true. Um. I never really thought about the order that they were just kind of I didn't write them in any specific order of importance. Um. And so I think all seven of them are probably as true

today as as they were when I wrote them. Um, but I'm glad to say I definitely wouldn't rewrite any of them. Uh. Let's talk a little bit about your role of GMO. What does being on the asset allocation team? They're INTEL, so it's it's my role is is a research role um and and that's one that I I thrive on. M I enjoy and then enjoy is solving puzzles,

and to me, investing is perhaps the ultimate puzzle. It's never exactly the same um And there are always uncertainties, and really my job is to sit there and think. My my children asked me. My daughter turned around to me and said, what do you do for a living, Dad? And I said, well, I think, um And she was I don't think enormously enamored with that answer, but it

is essentially what I am paid to do. I'm paid to sit here and think about life, the universe and everything, um and really understand end as much of that as I can and make sure that that we are investing in a way that that kind of makes sense. That that reference sounded like a Douglas Adams title. So uh so let me have you. Let me have you think about something that I find a puzzle that I find quite fascinating and challenging, And it has to do with valuations.

And the question is this, the world has changed over the past century. Does it make sense to compare valuations of today with those in the nineteen thirties and forties,

or or the nineteen eighties and nineties. How has the inherent capital structure of companies, what they need in terms of labor and material changed from I don't know, five ten decades ago versus today's fast light UH to two founders and a laptop and and the Amazon cloud versus ons and tons of steel and factories and thousands of employees. Do we really have the same valuator valuation metrics today that we had early last century. It's an extraordinary good question.

I think that there is there is another Bend Graham quote which is effectively um that the only constant is change ah. And it is certainly true, right, And I totally understand that when one's comparing long runs of data, let's say, looking at a chiller kpe UM in the eighties that reflected an environment which was essentially mainly railroads. UM today that does not seem like a terribly useful

proxy for anything of any interest. However, I think it is worth pointing out that in the eighties railroads we were cutting edge, right. They were the railroad bone booms of the eighteen fourties and eighteen seven um were the cutting edge of technology. And so I think the stock market obviously evolves over time. It's composition evolves over time, but it is often with a strong technological bias. And there's a wonderful book by a friend of mine called Sanding.

His name is Sandy there and the book is called The Engines that Move Markets. He actually worked as the head of research for Templeton a long time ago, UM. And in that book he traces all of these waves of technological innovation from the railroads through to the telegraphs, to the radio, to television, to the automobiles, et cetera, UM. And the one thing that they all have in common is they start off generating enormous returns. People will then drive the prices up to a bubble or something that

approximates a bubble. There they effectively extrapolate profitability ento prices UM and eventually that bubble wines because the gains of that technology end up with the consumers, not the producers. Um. And to me, that is why I think that we get these these kind of historical echoes. And it makes some sense to to say, hey, look there are some constants evaluation. That isn't to say every valuation metric is perfect. It isn't. Price to book is a really good example.

Price to book gets distorted by things like buy backs um. And so you end up with companies with negative book value, which is essentially economically meaningless um. And so you have to kind of you can't take um these things that face value and say hey, look, uh yeah McDonald's is trading on a negative book value. Yeah, because it's done

an enormous amount of buy backs um. And so I think you do have to to apply some some thought and and Beninker, my boss set to me the other day we were having a discussion in a group, and he said, we always reserved the right to use our brains. Uh. And I think that is a sounder things for advice, as I can imagine, we should always reserve the right to use our brains. Um. And there will be times when you you want to question stuff. The role of

the stock market itself has changed. The stock market used to be a method of finance and companies. That hasn't been true since UM Really the midnight UM companies do not in general come to the market um to to to raise capital and in equities unless the I p O. Everybody else doesn't, and so the amount of buybacks far outstrips the amount of I p o s, and so

what we actually see is negative icuants. So there are differences that it's important to recognize, and one does have to think carefully about the valuation metrics that one chooses to use, but I think a lot of them, and the higher the aggregate level that the more that makes sense. So looking at a Shillo or KP for the aggregate market, I think it's a lot more sensible than trying to look at Apple or Google Amazon's shillape, which I think

is pretty meaningless. UM. So I think it does depend on on the level of the analysis and the particular specifics of the analysis. So using one's brain is highly recommended. I can't can't say I argue with any of that. Let let me have you use your brain on another issue that that I've been and I think a lot of people have been perplexed by. And that's the issue of negative interest rates at a lot of industrialized nations. We we briefly source some short term treasuries go negative.

United States. What does it mean to see so much of the world dabbling with negative interest rates? And are we going to see this in the United States? It's fascinating right as people central banks from it when they take rates negative. I genuinely don't understand what they're thinking. I can get what you want to take the rates row low if you're a central banker. I do not understand negative of interest rates because negative interest rates are

attacks on banks. Now, don't get me wrong, I'm perfectly happy at tax banks. But from a policy response to effectively trying to create an economic stimulus, one of the things I do remember from economics is that the taxes are are a leakage. There are a break on economics, not a not a not a stimulus um. And so therefore relying on negative interest rates to try and boost activity I think is kind of weird. Um. I don't

think it makes a great deal of economic sense. Um. I think it also trying to blows up a lot of people's models, because an awful lot of modern day asset pricing for the better or worst takes it its cue from from the interest rate. It's now. As much as I don't think that's particularly sensible, UM, I do acknowledge that a lot of people behave that way. UM. And it does strike me that the negative interest rate

could potentially muck up quite a lot of that approach. UM. And so I think it's uh, it's an odd policy with unknown consequences which I do not think should be pursued lightly. UM. As to whether the US is ever going to get there, I have absolutely no idea. UM. If I if I go back twenty years, I used to be one of those people who said our interest rates can't go below zero um, because you know, it

seems so unthinkable. Um. And yet I probably should have to go back more than a decade, right, two decades for me to have been saying that. Um. But fast forward and there we are. We we've seen them, so never say never. I guess right, it ain't called the zero bound for nothing, Although I guess maybe you so, so let me ask let me, let me ask you a different policy question. You seem to be somewhat enamored of modern monetary theory, which basically says, stop freaking out

over deficits. If the government issues currency and it's it's has control of its own currency and can issue debt that people want to buy, deficits, aren't the end of the world. Tell us a little bit in this election year what you think about modern monetary theory and what it means for how we should be assessing how governments will be interacting with markets. Yeah, I think n m T. Modern monetary theory is UM. That that very um, that that label tends to to get people's tackles rising. Right,

it's um. You know, it doesn't matter whether it's it's on the right or the left, and people get very upset and very passionate and start throwing Zimbabwe around is and the hype of inflation of Venezuela and those sorts of things. UM. But actually I think it's that the core of what I perceive of monetary Modern monetary theory

is a descriptive model of how the world actually works. UM. And it says that effectively, government don't have to finance their their deficits if, as you say, they are what we call monetarily sovereign, I they issue bonds in a currency which they control. So it is absolutely a description of the US, Japan, and the UK. It is absolutely not a description of the Eurozone, where the country is obviously issue debt in euros which they don't control. That's

in the hands of the c D. UM. So I think there is this this kind of common belief that governments are really like households, they have to live within their means um and I think that's just fundamentally false as a paradigm. And I think when you begin to understand the way that government spend and and potentially the reason why the money exists, um, it's really exists as a form of debt settlement. And that is true pretty

much as far back as anybody can go. Um. The geld is the word for for guilt and obligation, which is is the the the the historical form of money um and so I think it it's to my mind, um m M T is a much more accurate description of the way the world works, and therefore understanding how the world works, which is ultimately kind of my aim in life is goes back to the topic of on earlier. I'm paid to sit and think and try and understand

the world. UM. Well MMT to me, it offers a much better framework for understanding the way the world works than a lot of other economics. And it does one to say that, look, budget deficits are not nearly as problematic as people believe. You know, there's a school of thought that they lead to incredibly high interest rates. Well,

just look at the evidence. That's not the case right now, And it hasn't been the case in Japan for a very very long time, where they've run very low interest rates and very big government deficits, and then quite rightly they've had to do that, but it's certainly those deficits haven't led to high interest rates. UM. Then you get people turning around and saying, oh, well, printing money to the finance budget deficits as inflationary, and you're like, really,

where's the evidence for that. Um. First of all, governments don't actually worry about printing money, is how they've always acted. You have to print money in order to spend it, um, and to get it into circulation before people can even pay their taxes. UM. So there's kind of a whole series of myths that people have UM that are very much caught up with the analogy of governments and households. And it's certainly true for households they cannot live sustainably

beyond their means, but it is not the case for government. Um. They can. They can as long as they meet the criteria we we talked about earlier, that they are absolutely capable of going out and spending. It's it's very interesting that today we see a much broader acceptance of that in the response to the various corona outbreaks around the world and here in the UK, where government is underwriting percent of people's wages um and and that would have

been unthinkable. Uh. You know, we saw the conservative government, right we we saw what happened post financial crisis when the Wistarians were in control and we're more focused about balancing budgets than helping the economy recover. That didn't end especially well in the UK or the United States? Did it? Not exactly right? In the US you had the slowest and weakest recovery ever um and in the UK it was a total disaster. We we essentially didn't have any recovery.

Um and so the the Austerians and the kind of advocates of sound finance, which is the balance you must balance the budget, etcetera. I think renolds with sensible evidence based economics, and I'm a big fan of evidence based anything, evidence based medicine, evidence based investing, evidence based economics. One should always mark one's beliefs to market. Check the real world, see how it looks. So last quote of yours before we get to our speed rounds, and I want you

to expound on this. Don't equate happiness with money. Materialistic pursuits are not a path to sustainable happiness. Explain. So. Yeah, a long time ago, UM, I wrote a couple of notes on on how to be happy. UM. And then it just struck me as something that I spent a long time working at investment branks at that stage, UM, and I kind of was slightly worried that I looked into people's eyes and it was like staring into the

zombie's eyes that they have. The lights were on, but nobody was home, um, and they seemed dead on the inside. And I really couldn't fathom how that could happen. UM. And I began to do some research on on happiness and the science of happiness. UH, and it turns out there there are a number of people who have thought about happiness UM. And one of the big difficulties is that people tend to associate happiness with with wealth or

or income. And don't get me wrong, a certain level of income is necessary, UM, But beyond that level of kind of that threshold, it really isn't obvious that the greater increases in wealth and income lead people to be happy. UM. For the vast majority of people trapped in poverty, of course,

an improvement in their income would help them. But for let's say, you know, the top uh ten percent of the population, UM, increasing their material um worth is it's probably not going to have a great deal of impact on on their happiness. And I think that the problem a lot of people have is UM what we call headon hedonic adaptation, which is you get used to stuff very quickly. UM. So you get a new car and you really love it and it feels great, but within six, three,

twelve months, whatever it might be, it's just your car. Right, your kids are in the back, they've scuffed up the back seats, they've put their muddy boots on it, the dog's been in the boot, and then it's really not a new car, and it's devalued quite a lot in your own eyes, let alone. It's it's economic worth um. And so we we were on this what they call the hedonic treadmill UM, that we we adapt very fast

to our environment, on our material all ownership. UM. And this rang through with me was when I was young, I spent a long time traveling the world, and some of the poorest people were amongst the happiest I've ever met. I was traveling in Thailand and there were people who essentially had very very little, and yet they were absolutely some of the nicest, friendliest people I've ever met, and they were willing to share what little they had with me.

A stranger is just traveling through their village. UM. And I started reading both science and then the dial Arma on on happiness, and the dial Arma is an interesting man because he very obviously a very spiritual individual, but one who is absolutely certain that if science proved something that he believes to be wrong, that he will update his beliefs UM. And there I found a lot of wisdom about UM. The way to be happy is not

surrounding oneself with materialistic possessions, but experiences. And for me that that really rings true. And I think too many people focused far too much on on money, UM and materialistic pursuits rather than thinking about what might make them, UM a happier individual. Tom Gilovich, I know, has written some research that echoes exactly what you're saying. Experiences are

far more lasting and social than mirror objects. So I know I only have you for a limited yep, I know I only have you for a limited amount of time. Let's jump to our speed round. Um. Normally these are ten questions, but given our circumstances, we're going to keep them to five. Uh. Tell us what you are watching today? What are you streaming on Netflix or any other service? What are you podcasting or listening to? I am something

of a luddite. I confess I'm probably much more likely to be found reading a book than that I am watching television. But I have to say on Netflix, I did thoroughly enjoy Stranger Things. That to me was a very well made and entertaining program. If you like Stranger Things, let me recommend Electric Dreams. I think that's Amazon Prime, UM, but it's a similar concept. We'll see, We'll see if you like that. Early mentors Early mentors who influenced your career.

Albert Edwards above and beyond all else. My my we spent scotsh nearly eighteen years working together, I think, um and he had a huge impact on me from when I was joined the team he was on when I was a junior economists way back and all those years ago. UM, I'm watching the way that Albert's worked and thought really did define the way that today I work and think. Quite interesting. You mentioned you're spending a lot of time reading. Tell us some of your favorite books, fiction, non fiction,

finance or anything else. What have you been enjoying and what are you looking forward to reading. I try to read fairly widely. Um. I think one can often find insights into all sorts of problems um from from very different perspectives. But I think my favorite investment book is probably SETH Carman's Marginal Safety, which we've we've mentioned earlier. I think there is a tremendous amount of value in there.

Outside of that, I'm currently reading a book on biomechanics, um I. I my big passion outside investing is is taekwondo, and I was fortunate enough last week to take part in the seminar with one of the Russian grand masters, Grandmaster Kang and he's a big exponent of of understanding biomechanics to to improve our taekwondo performance. And so I'm trying to understand how physics applies to the human body right now. Huh, give us one other. What else are

you reading and enjoying? Um? What else am I reading? Enjoy? I actually enjoy? Really my guilty pleasure is airport thriller, as I will read almost any airport thriller when I'm stuck on a plane. I will quite happily dig into pretty much any thriller. Um. So the lower brower, the better. Give us an author's name of these low brow thrillersh me, I I kind of I do like Mark Billingham. He writes a series of detective novels that I find most enjoyable.

What sort of advice would you give a recent college grad who was thinking about going into the investment field. Don't do it, Go and do something future with your life. No. I look, I think that the investing needs bright, sensible people. But I kind of think there's an awful lot else that people we need in this world, and investing is

probably not the highest and best pursuit. Um. I think far too many people who go into investing are kind of linded by the dollars um and so I think, go and become a doctor or an engineer or something that might actually help humanity. And our final question, what do you know about your chosen fields of investing today that you wish you knew thirty years ago when you were first getting started. Oh man, that's such a good question, I think. Um, I wish I knew not to be

so confident. Um My. My my very first job was as an ex strategist and I had an incredibly humbling lesson where I UM. I recommended a position that was short the Swedish corona um based on some very bad economic analysis that I've done. It turned out eventually to be correct. But in the first week that we had that trade on UM, the head of the four ex division told me we lost more money in that on that trade than I made in an entire year. Now I was a graduate, so I didn't make a huge amount,

but it was an incredibly humbling experience. Uh. And I think the older, again, the less certain I am about almost everything, um, which is I'm not sure it's a good thing or not, but certainly I wish the younger me had not been quite as arrogant and um confident as as I was. We have been speaking with James Montier. He is the He is a member of the GMO

Asset Allocation Team. He is the author of such books as Behavioral Investing, A Practitioner's Guide to Implying Behavioral Finance, The Little Book of Behavioral Investing, and Value Investing, Tools and Techniques for Intelligent Management. If you enjoy this conversation, well, be sure to look up an Inch or down an Inch on Apple iTunes and you could see any of the prior three hundred such conversations we've had before. We love your comments, feedback and suggestions right to us at

m IB podcast at Bloomberg dot net. I would be remiss if I did not thank the crack staff that helps us put together these conversations each week. Charlie Volmer is my audio engineer. Michael Batnick is my head of research. Attica val Bron is our project manager. Michael Boyle is my producer. I'm Barry Retolds. You've been listening to Masters in Business on Bloomberg Radio