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Tortoise and hare

Recently, as I was judging the shortlisted candidates for the Yettanotha financial services journalism award, I was – and not for the first time – struck by the fund-amental incompatibility of investment and most of the media that covers it. Investment, at least in theory, is about taking a long-term view – something that is of course hardly written into the DNA of news websites, daily papers and even, with the greatest respect to my host, weekly titles.

It is why I felt so comfortable being part of a monthly personal finance magazine for as long as I was – and why, a decade or so back, producers of obscure financially-oriented television shows stopped inviting me on after about three appearances. My dogged belief that investment essentially revolves around a mere handful of ideas – an individual’s objectives, attitude to risk, timeframe and so on – has much to commend it but, after a while, makes for lousy telly.

Not that I’m bitter – well, not much – that a potentially glorious television career was doomed before it began as a result of my unwillingness to rave about a particular company, sector or market one week and then, with equal conviction, call for everybody to bale out of it the next. Equally, I understand that… let’s call them philosophical inconsistencies are part-and parcel of the daily and weekly news whirl but that does not mean I have to like it.

All of which should help explain why I have been gently reassured by the recent thoughts of asset allocation and behavioural finance guru James Montier that appeared in a GMO ’white paper’ – the new term for ’thought leadership’ now that phrase has lost all meaning through overuse.

The paper outlines his seven immutable laws of investing, which are: ’Always insist on a margin of safety’; ’This time is never different’; ’Be patient and wait for the fat pitch’; ’Be contrarian’; ’Risk is the permanent loss of capital, never a number’; ’Be leery of leverage’; and ’Never invest in something you don’t understand’.

None of these ’laws’ is necessarily going to make your clients a fortune but they could well help save them one. What is more, the clarity and conciseness of their phrasing means pretty much any investor ought to be able to follow them – although, in keeping with his behavioural finance status, Montier acknowledges that does not necessarily mean they will.

“Many investors seem to suffer from an action bias – a desire to do something,” he notes in relation to his third law, which, just to be clear, invokes a baseball metaphor. “However, when there is nothing to do, the best plan is usually to do nothing.”

As for his fourth law, he quotes a Keynesian gem: “The central principle of investment is to go contrary to the general opinion, on the grounds that if everyone is agreed about its merit, the investment is inevitably too dear and therefore unattractive.” He adds: “Adhering to a value approach will tend to lead you to be a contrarian naturally, as you will be buying when others are selling and assets are cheap and selling when others are buying and assets are expensive.”

What really struck me was how Montier’s fifth law reveals the lunacy of current investment thinking and heads back to the basics. “Regrettably, the obsession with the quantification of risk (beta, standard deviation, VaR) has replaced a more fund-amental, intuitive and important approach to the subject,” he says.
“Risk clearly isn’t a number. It is a multifaceted concept and it is foolhardy to try to reduce it to a single figure.

“The permanent impairment of capital can arise from three sources: valuation risk – you pay too much for an asset; fundamental risk – there are underlying problems with the asset you are buying (also known as value traps); and financing risk – leverage. By concentrating on these aspects of risk, I suspect investors would be considerably better served in avoiding the permanent impairment of their capital.”

It is too late now but, I wonder, maybe if I had used words such “immutable” and “laws” 10 years ago, my golden future in television might not lie so firmly behind me.

Julian Marr is editorial director of and


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