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James Montier on Fear and Investment (Podcast) · Masters in Business

• 0:02
  Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg
• 0:06
  Speaker 1: Radio this week on the podcast I Know, I say
• 0:10
  Speaker 1: I have an extra special guest all the time, but
• 0:13
  Speaker 1: I really have an extra special guest. His name is
• 0:15
  Speaker 1: James Montier. You know him from his years as partners
• 0:20
  Speaker 1: with Albert Edwards at both Dressner and Society General. He
• 0:24
  Speaker 1: is currently on the asset allocation team at GMO. And
• 0:30
  Speaker 1: I know James in passing for many years and I
• 0:33
  Speaker 1: have been chasing him down to come into the studio
• 0:37
  Speaker 1: to record one of our little chats, and he is
• 0:41
  Speaker 1: so difficult to pin down. He is located in the
• 0:45
  Speaker 1: hinterlands of the UK. He's not even in London. He's
• 0:48
  Speaker 1: hiding in an undisclosed location north of UH, north of
• 0:52
  Speaker 1: the city UH. And he is in and out of
• 0:55
  Speaker 1: Boston and New York so frequently it's tough to grab him.
• 0:59
  Speaker 1: But since we're all sheltering in place and he has
• 1:01
  Speaker 1: nowhere to go, I was able to pin him down
• 1:04
  Speaker 1: for the better part of an hour and got to
• 1:07
  Speaker 1: ask him about half of the questions I want to UH.
• 1:11
  Speaker 1: James is really a fascinating thinker. UH. He describes that
• 1:15
  Speaker 1: as his job. He gets paid to sit and think
• 1:19
  Speaker 1: about the difficult questions that other people don't want to
• 1:22
  Speaker 1: think about. He also has written pretty extensively, not only
• 1:27
  Speaker 1: about behavioral investing in finance, but about some of the
• 1:31
  Speaker 1: challenges of being a value investor and looking at markets
• 1:37
  Speaker 1: from a perspective of having a margin of safety. Regardless,
• 1:42
  Speaker 1: you will find this to be an absolutely fascinating conversation.
• 1:45
  Speaker 1: He is a really thoughtful, intriguing guy and he did
• 1:49
  Speaker 1: not hold back at all. So, with no further ado,
• 1:53
  Speaker 1: my conversation with GMOs James Montier vis his Master's Business
• 2:00
  Speaker 1: with Barry Ridholts on Bloomberg Radio. My extra special guest
• 2:05
  Speaker 1: this week is James Montier. He is a member of
• 2:09
  Speaker 1: the investment committee for GMO, the famed investment farm headed
• 2:14
  Speaker 1: by Jeremy Grantham. Previously, he worked at Dressner as well
• 2:18
  Speaker 1: as Society General as a market strategist. He has an
• 2:23
  Speaker 1: ardent reputation on Wall Street. He has been named Best
• 2:28
  Speaker 1: Strategist a number of years and has a reputation as
• 2:32
  Speaker 1: both a bear and a value manager. James Montier, Welcome
• 2:38
  Speaker 1: to a Shelter in Place edition of Masters in Business.
• 2:42
  Speaker 1: Thank you very much, Barry to delight to be here.
• 2:44
  Speaker 1: Let's talk a little bit about your current gig. You're
• 2:47
  Speaker 1: working at GMO, where you've been for a couple of years,
• 2:51
  Speaker 1: but before you started at GMO, you were at Society General. Uh,
• 2:55
  Speaker 1: tell us a little bit about your role there. Sure. So,
• 2:59
  Speaker 1: I've done a lot of things over the years, and
• 3:01
  Speaker 1: incredibly I've been at GMO for for over a decade now,
• 3:05
  Speaker 1: which is is startling, um and testament to how time
• 3:09
  Speaker 1: flies when you're actually enjoying yourself. Um. So what I
• 3:13
  Speaker 1: do the GMO is is essentially asked the questions that
• 3:15
  Speaker 1: people don't want to be asked. My finally found a
• 3:20
  Speaker 1: job that I am perfectly suited for. My job is
• 3:23
  Speaker 1: to think about all the places we could be wrong, um,
• 3:27
  Speaker 1: whether that's in in kind of the micro level or
• 3:31
  Speaker 1: indeed at the macro level. So I spend all of
• 3:33
  Speaker 1: my time worrying about what the models are missing, um
• 3:37
  Speaker 1: for part of my job. And then the other part
• 3:39
  Speaker 1: of my job is is really something to the table
• 3:42
  Speaker 1: when when things get cheap. So when I joined GMO,
• 3:46
  Speaker 1: jeremy terms and said to me, look, one of the
• 3:49
  Speaker 1: things that we really want you to do is when
• 3:51
  Speaker 1: you think things are cheap, really really scream and shout
• 3:54
  Speaker 1: and make sure that we're not missing out. I've only
• 3:56
  Speaker 1: had to do that a couple of times, which is
• 3:59
  Speaker 1: a sad refle action on the state of the markets
• 4:01
  Speaker 1: that I've I've had to sit through for the last
• 4:04
  Speaker 1: decade or so. Um, but it is. It's a kind
• 4:07
  Speaker 1: of perfect job. There are essentially two jobs at GMO
• 4:10
  Speaker 1: you would love and one that you you really wouldn't want.
• 4:14
  Speaker 1: The two that you would love the one that that
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  Speaker 1: Jeremy has as as chief strategist. I'm the one that
• 4:19
  Speaker 1: I have, which is effectively minister without portfolio. The one
• 4:23
  Speaker 1: you really wouldn't want to have is is poor old
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  Speaker 1: Ben ben into the head of our allocation because he
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  Speaker 1: gets to sit there and has to kind of listen
• 4:30
  Speaker 1: to Jeremy and listen to me and then try and
• 4:34
  Speaker 1: build that into a real portfolio. So his is the
• 4:37
  Speaker 1: job you definitely wouldn't want. Mine is a is a
• 4:40
  Speaker 1: pretty sweet gig. So part of your description is to
• 4:44
  Speaker 1: pound the table when things get cheap. Markets just dropped
• 4:48
  Speaker 1: thirty five percent last month. Was there any table pounding
• 4:52
  Speaker 1: going on at GMO? Where did they not get cheap
• 4:54
  Speaker 1: enough that there there was there wasn't decent table pounding
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  Speaker 1: going on. I was being very very excited about particularly
• 5:04
  Speaker 1: non US based equities. The US didn't get cheap enough
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  Speaker 1: for my particular brand of value, but emerging markets were
• 5:13
  Speaker 1: looking really really cheap, and a lot of the international
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  Speaker 1: markets Europe was was looking pretty pretty damned exciting as well.
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  Speaker 1: So there was a fair amount of table pounding, and
• 5:24
  Speaker 1: hence the reason why I actually put pen to paper
• 5:27
  Speaker 1: a couple of weeks ago and wrote a piece on
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  Speaker 1: fear and the psychology of bear markets to to try
• 5:32
  Speaker 1: and galvanize people to to action, because it struck me
• 5:37
  Speaker 1: that this was one of those opportunities where where prices
• 5:40
  Speaker 1: and fundamentals were potentially getting dislocated. So let's talk about
• 5:45
  Speaker 1: the prior time prices really got cheap. You and your
• 5:50
  Speaker 1: partner over at sak Gen and Dressner, Albert Edwards, were
• 5:55
  Speaker 1: famously bearish heading into the YO eight or nine crisis.
• 5:59
  Speaker 1: Were you looking at that had made you that negative
• 6:04
  Speaker 1: on equities prior to the Great Financial Crisis? So I
• 6:08
  Speaker 1: think from from our perspective, there were a kind of
• 6:11
  Speaker 1: number of events that were going on the really kind
• 6:15
  Speaker 1: of triggered our caution. But the most obvious one was
• 6:18
  Speaker 1: kind of the immense housing bubble the we've been talking
• 6:23
  Speaker 1: about for in fairness a couple of years before the GFC. So,
• 6:26
  Speaker 1: as usual with most of my work, I find it's
• 6:30
  Speaker 1: it's best to read it, then put in a drawer
• 6:32
  Speaker 1: and forget about it for two years, and then take
• 6:33
  Speaker 1: it out and actually act on it UM because it
• 6:36
  Speaker 1: seems to take about that long for for my my
• 6:40
  Speaker 1: sense of timing to come good. But it was it
• 6:43
  Speaker 1: was really the housing market and the economic imbalances that
• 6:47
  Speaker 1: were so um obvious to anyone who kind of studied
• 6:51
  Speaker 1: the flow of funds, who looked at the sectoral balances
• 6:55
  Speaker 1: for the us UM, there there were just such obvious
• 6:58
  Speaker 1: glaring um imbalanced is that that were unsustainable UM. And
• 7:04
  Speaker 1: as ever, an unsustainable process can't go on forever, but
• 7:09
  Speaker 1: it generally goes on for longer than one imagines. And
• 7:12
  Speaker 1: that was one of the things that we were really
• 7:15
  Speaker 1: battling with UM was was the kind of when, and
• 7:19
  Speaker 1: it is every time when when we get bearish, it's
• 7:22
  Speaker 1: the the when is always the problem. But the economic
• 7:26
  Speaker 1: imbalances were just so marked, but it was it was
• 7:28
  Speaker 1: hard not to be bearish. Coupled that with what was
• 7:32
  Speaker 1: a pretty damned expensive market on the simple Chiller style
• 7:36
  Speaker 1: valuation as cycnically a justice fee, and it led us
• 7:39
  Speaker 1: to be yeah, as bearish as as I think we've
• 7:42
  Speaker 1: probably ever been. Yeah, that that timing issue is always
• 7:46
  Speaker 1: problematic because, as we've seen over various cycles, expensive stocks
• 7:52
  Speaker 1: can get much more expensive and cheap stocks can get
• 7:56
  Speaker 1: much cheaper. Is it really just a two year lag?
• 8:00
  Speaker 1: How do you deal with I guess we could call
• 8:02
  Speaker 1: that the momentum issue when you're looking at either cheap
• 8:06
  Speaker 1: or prices stocks. Yeah, it's it is. It is a
• 8:10
  Speaker 1: momentum issue. You're absolutely right, And it is both momentum
• 8:13
  Speaker 1: in terms of the movement of prices and also momentum
• 8:16
  Speaker 1: in terms of the underlying economics of the situation as
• 8:20
  Speaker 1: well on occasion. And I think the way I've been
• 8:23
  Speaker 1: forced to reconcile it is to say, look, I simply
• 8:25
  Speaker 1: don't know. I never know when something is going to
• 8:29
  Speaker 1: to unravel. Um. I can often see the the unsustainable
• 8:34
  Speaker 1: nature of what is happening, but it doesn't tell me
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  Speaker 1: anything about timing. And I think that's one of the
• 8:40
  Speaker 1: things that that really harks back to some of the
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  Speaker 1: writings of Ben Graham Ben Graham said there were two
• 8:45
  Speaker 1: ways of thinking about investing in the market, the way
• 8:49
  Speaker 1: of timing and the way of pricing UM. And the
• 8:52
  Speaker 1: way of timing was trying to effectively guess what was
• 8:54
  Speaker 1: going to happen UM. And that is essentially next to
• 8:57
  Speaker 1: impossible as far as I can concerned. I think there
• 9:00
  Speaker 1: are potentially people who can do it. I just know
• 9:02
  Speaker 1: that I am definitely not one of them. UM. And
• 9:05
  Speaker 1: on the other hand, there is the way of pricing.
• 9:07
  Speaker 1: And on the way of pricing, you you simply follow
• 9:09
  Speaker 1: the rules of valuation. Now, if you're going to do that,
• 9:12
  Speaker 1: you're going to need to have a long time horizon,
• 9:15
  Speaker 1: and that is one of the most important, if not
• 9:18
  Speaker 1: the most important colory of being a value based investor
• 9:21
  Speaker 1: is you're going to have to be long term. And
• 9:23
  Speaker 1: the problem is, of course, as we well know, everybody
• 9:26
  Speaker 1: starts off as a long term investor, but as soon
• 9:29
  Speaker 1: as they hit a patch of poor performance, they become
• 9:32
  Speaker 1: rather too short term UM. And that is why I
• 9:35
  Speaker 1: think so many people struggle with the whole staying true
• 9:39
  Speaker 1: to being a value based investor over any length of time.
• 9:43
  Speaker 1: Sounds like the Mike Tyson quote everybody has a plan
• 9:47
  Speaker 1: until they get punched in the face. You're saying, right,
• 9:50
  Speaker 1: exactly plans of of investors work great until there's a
• 9:55
  Speaker 1: little volatility in turbulence like we've seen earlier this year.
• 10:00
  Speaker 1: Exactly right. It's it's precisely that. It's it's easy to
• 10:04
  Speaker 1: have a plan, UM. It's the discipline of sticking to
• 10:07
  Speaker 1: that plan. And it's one of the reasons that I
• 10:10
  Speaker 1: enjoy my time at GMO so much is because we
• 10:13
  Speaker 1: have a discipline. We have a series of valuation based
• 10:17
  Speaker 1: forecasts that help us anchor UM and in psychologies, you know,
• 10:22
  Speaker 1: I have a great interest in psychology. UM. There is
• 10:26
  Speaker 1: an expression which is if you cannot d buy us,
• 10:28
  Speaker 1: then re buy used. And what that really means is
• 10:31
  Speaker 1: it's incredibly hard to stop people being people. UM. It
• 10:34
  Speaker 1: is our very nature. So instead of trying to stop
• 10:38
  Speaker 1: them being UM people, the best thing to do is
• 10:41
  Speaker 1: to try and, knowing that they're going to fall into
• 10:43
  Speaker 1: these behavioral pitforces, to design a process that will actually
• 10:47
  Speaker 1: allow them to UM benefit from those same behavior pitface
• 10:53
  Speaker 1: is kind of like nudge if you like UM, and
• 10:56
  Speaker 1: and the way that we do it is to have
• 10:58
  Speaker 1: that valuation discipline. So when the world is falling apart.
• 11:01
  Speaker 1: Our value models are all else being equal, going to
• 11:04
  Speaker 1: be saying, hey, look things are getting cheap, you should
• 11:06
  Speaker 1: be buying UM. Now we are just as much human
• 11:09
  Speaker 1: as everybody else. And I'd like to sit around and go, well,
• 11:12
  Speaker 1: you know what, owen the models know what? What? You know? Why?
• 11:16
  Speaker 1: What happens if the world does end tomorrow? That kind
• 11:17
  Speaker 1: of thing. But having that conversations at least step in
• 11:22
  Speaker 1: the right direction and seeing those numbers. When you're seeing
• 11:24
  Speaker 1: you have double digit rates of prospective return UM, you
• 11:28
  Speaker 1: have to be really, really sure that you know something
• 11:31
  Speaker 1: the model doesn't in order to override it. Let's talk
• 11:34
  Speaker 1: about behavior and valuation. I love this quote of yours.
• 11:39
  Speaker 1: Leaving the trees could have been our first mistake. Our
• 11:42
  Speaker 1: minds are suited to solving problems related to our survival
• 11:46
  Speaker 1: rather than being optimized for investing decisions. Explain that if
• 11:51
  Speaker 1: you would. Of course, so, I think it's it's kind
• 11:54
  Speaker 1: of important that we acknowledge that we are the way
• 11:57
  Speaker 1: we are because of the solution UM evolution has has
• 12:00
  Speaker 1: designed us to work. But evolution is in essence a
• 12:04
  Speaker 1: glacial process. It does not reflect the world we live in.
• 12:08
  Speaker 1: UM you know, we are really designed for the African
• 12:11
  Speaker 1: savannah of a hundred and fifty thou years ago, not
• 12:15
  Speaker 1: certainly the industrial age of a hundred years ago, let
• 12:18
  Speaker 1: alone the information age in which we find ourselves drowning today.
• 12:22
  Speaker 1: So I think that the brain is a product of
• 12:25
  Speaker 1: those same evolutionary forces that have designed us in every
• 12:29
  Speaker 1: other regard, and that means our brains are not well
• 12:33
  Speaker 1: adapted to the problems we're trying to solve. And so
• 12:37
  Speaker 1: if we think about fear is a really good example
• 12:40
  Speaker 1: of this um in evolutionary terms. The cost of getting
• 12:45
  Speaker 1: it wrong is is pretty terrible. So if you see
• 12:48
  Speaker 1: a twig and you think it's a snake, that's fine, right,
• 12:54
  Speaker 1: you stepped out the way, you took a slightly wider path,
• 12:57
  Speaker 1: but it was fine. Get that wrong, and the downside
• 13:00
  Speaker 1: is its potentially pretty pretty terrible. If you think it
• 13:04
  Speaker 1: was a twig, in your step on it, it turns
• 13:05
  Speaker 1: out as a snake and it bites you. You You are
• 13:07
  Speaker 1: evolutionary toe um. And so the brain is is designed
• 13:13
  Speaker 1: to work in a certain way, and when it comes
• 13:16
  Speaker 1: to fear, is designed to to make very short, quick
• 13:20
  Speaker 1: decisions that will keep us alive. Now, the problem is
• 13:24
  Speaker 1: that when it comes to investing, and let's say markets
• 13:28
  Speaker 1: are falling, as they obviously have been over the last
• 13:31
  Speaker 1: month or so. UM, then what we're doing is we're
• 13:35
  Speaker 1: triggering out fear response. And there was a wonderful behavior
• 13:38
  Speaker 1: experiment by shivn and some co authors who looked at
• 13:45
  Speaker 1: the impact of fear on investment decision making. And they
• 13:50
  Speaker 1: set up a really simple game where you've got to
• 13:52
  Speaker 1: choose over twenty rounds each round whether you wanted to invest,
• 13:55
  Speaker 1: and they wanted to see if you suffered a loss
• 13:58
  Speaker 1: in the previous round, would it impact your decision to
• 14:01
  Speaker 1: invest in the next round, And obviously it shouldn't if
• 14:04
  Speaker 1: you were rational. UM. What they found was for for
• 14:08
  Speaker 1: normal people people like you and I, UM, that actually
• 14:12
  Speaker 1: it did when you lost money in the previous round,
• 14:15
  Speaker 1: they were much much less likely to invest in the
• 14:17
  Speaker 1: next round. That wasn't true for a subset of people
• 14:21
  Speaker 1: they examined, and that subset were very unusual. They had
• 14:25
  Speaker 1: a specific form of brain damage which meant that they
• 14:28
  Speaker 1: could no longer feel fear. There amigl dala, which is
• 14:31
  Speaker 1: one of the brain center of fear of being irreprotably
• 14:33
  Speaker 1: damaged UM, and so they behaved much more like a
• 14:38
  Speaker 1: model of rationality. They invested irrespective of the outcome in
• 14:42
  Speaker 1: the previous round. So our brains are designed by this
• 14:45
  Speaker 1: process is evolution to work in certain ways that keep
• 14:49
  Speaker 1: us alive but don't give us necessarily the correct outcome
• 14:53
  Speaker 1: when it comes to the world in which we're trying
• 14:55
  Speaker 1: to think today in investing. So the secret too good
• 15:00
  Speaker 1: investing is really just a modest amount of brain damage.
• 15:04
  Speaker 1: I I'm standing by that, and then I'm pretty sure
• 15:06
  Speaker 1: most of my friends, with the test of that, I
• 15:10
  Speaker 1: can't say, I can't say I disagree with that. So
• 15:13
  Speaker 1: so or or if not brain damage, at least a
• 15:18
  Speaker 1: little bit of behavior control that doesn't look like the
• 15:23
  Speaker 1: typical normal human being and is a little more embracing
• 15:27
  Speaker 1: of risk than our evolutionary history might imply. Absolutely absolutely so.
• 15:37
  Speaker 1: So let's talk a little bit about how some of
• 15:39
  Speaker 1: these behavioral biases manifest themselves among investors. When I look
• 15:45
  Speaker 1: around the world and I look at some of the
• 15:47
  Speaker 1: areas that you have described as cheap emerging markets Europe elsewhere,
• 15:53
  Speaker 1: especially away from the United States, investors seem to really
• 15:58
  Speaker 1: hate those areas and have voted with their dollars how
• 16:02
  Speaker 1: much of this is a rational response to problems in
• 16:06
  Speaker 1: em and problems in Europe, and how much of this
• 16:09
  Speaker 1: is just being too fearful for attractively priced stocks. Yeah,
• 16:16
  Speaker 1: that is the the the pertinent and peronnial question that
• 16:20
  Speaker 1: one has to ask, um. And the answer is we
• 16:23
  Speaker 1: we can never be sure, or at least anyone who
• 16:26
  Speaker 1: says that's sure is is probably a liar or a
• 16:28
  Speaker 1: fall or some linear combination of the two, because you
• 16:32
  Speaker 1: can't know, And so all you can do is say,
• 16:36
  Speaker 1: have I got sufficient margin of safety? And it goes
• 16:39
  Speaker 1: back to good old Ben Graham. Um. I know I
• 16:41
  Speaker 1: sound like a broaden record always quoting Ben Graham, but
• 16:44
  Speaker 1: to me, he really is one of the most insightful
• 16:48
  Speaker 1: of histories examples of great investors, because he always said
• 16:54
  Speaker 1: you have to operate with the margin of safety, because
• 16:55
  Speaker 1: you know that if you're dealing with something like them. Yes,
• 16:58
  Speaker 1: they have much legal standards, much poor report corporate governance
• 17:03
  Speaker 1: than than say the US does, but we all know that,
• 17:06
  Speaker 1: and that's already in the price. And so if those
• 17:10
  Speaker 1: things then look really cheap, you're like, well, look, let's
• 17:14
  Speaker 1: take gas from as an example, the Russian energy company.
• 17:18
  Speaker 1: It trades on a pee of about two times, which
• 17:22
  Speaker 1: is clearly ludicrous. Nobody thinks gas From is worth two.
• 17:26
  Speaker 1: It's either worth zero because Putin thinks it belongs to him,
• 17:31
  Speaker 1: or it's worth a lot more than two. But it
• 17:33
  Speaker 1: trades on two um. And you're like, well, look, I
• 17:36
  Speaker 1: am being paid a lot to take on that risk.
• 17:38
  Speaker 1: Now push comes to shove, I will probably lose because
• 17:41
  Speaker 1: Putin owns tanks and I own bits of paper, and
• 17:44
  Speaker 1: his tanks will trump my bits of paper. But in
• 17:47
  Speaker 1: every year that I get that carry on on gas From,
• 17:50
  Speaker 1: it's paying out a dividend yield of six seven percent um.
• 17:54
  Speaker 1: That's a very nice return for taking that degree of
• 17:57
  Speaker 1: risk um every year without any worry about anything else.
• 18:02
  Speaker 1: And ultimately, you know, as long as you size a
• 18:04
  Speaker 1: position like that appropriately, I think it just makes a
• 18:08
  Speaker 1: great deal of sense because your marginal safety is so high.
• 18:13
  Speaker 1: So what are the credible reasons for this ongoing gap
• 18:19
  Speaker 1: and valuations between a country like the United States that
• 18:24
  Speaker 1: arguably still has the rule of law and countries like
• 18:28
  Speaker 1: Russia that have been described as you know, a criminal
• 18:33
  Speaker 1: organization with a standing army. How can an investor confidently
• 18:38
  Speaker 1: put money at risk in a place like China, like Russia,
• 18:42
  Speaker 1: where you never know how the rules are going to
• 18:44
  Speaker 1: change from quarter to quarter, a month to month. It's
• 18:48
  Speaker 1: it that is, and that is why they trade cheap, right.
• 18:51
  Speaker 1: You're absolutely right. You You you have a lower degree
• 18:53
  Speaker 1: of confidence, and you have to scale your positions appropriately
• 18:57
  Speaker 1: so you you don't put everything in to rush. He
• 19:00
  Speaker 1: don't put everything into China. You build a diversified portfolio
• 19:05
  Speaker 1: across any number of countries ranging from the ones with
• 19:10
  Speaker 1: the greatest corporate governance risk China and Russia, up to
• 19:13
  Speaker 1: two places that have considerably less Taiwan career. Um. They're
• 19:17
  Speaker 1: not perfect by any means, but you are being compensated
• 19:21
  Speaker 1: an awful lot for the risks involved right now. At
• 19:25
  Speaker 1: least not always the case, but right now, that is
• 19:28
  Speaker 1: the the the return you are getting I think way
• 19:32
  Speaker 1: outweighs the risks you are undertaking. Um. And so to me,
• 19:36
  Speaker 1: the arithmetic of the situation says, look size and appropriately
• 19:41
  Speaker 1: and invest with a degree of confidence. Um. But acknowledge
• 19:46
  Speaker 1: the fact that yes, you are taking on more risks
• 19:49
  Speaker 1: and therefore you you want that greater return. That's why
• 19:52
  Speaker 1: these things are priced at a discount, even on the
• 19:54
  Speaker 1: normal times. Now right now, that discount is way wider
• 19:57
  Speaker 1: than normal times, So your margin of safety is is
• 20:00
  Speaker 1: much greater than than average, which is why these things
• 20:03
  Speaker 1: to me look very attractive. So so, speaking of that
• 20:07
  Speaker 1: giant spread between EM and developed nations, especially the US,
• 20:13
  Speaker 1: I'm assuming you're predicating some of this on the concept
• 20:17
  Speaker 1: of mean reversion, that eventually stocks that are expensive will
• 20:21
  Speaker 1: come down in price, stocks that are cheap will rise
• 20:24
  Speaker 1: in price, and things will revert to normal. But we've
• 20:28
  Speaker 1: seen like a decade of EM underperforming the US. Are
• 20:32
  Speaker 1: you counting on mean reversion to to shift this or
• 20:37
  Speaker 1: is something more fundamental happening that's kept this spread as
• 20:41
  Speaker 1: wide as it's been for as long as it's been. Well,
• 20:46
  Speaker 1: it's it's exactly the debate that we have had internally. Interestingly,
• 20:50
  Speaker 1: the strangely enough, given how wrong we have been on
• 20:54
  Speaker 1: the U s UM, it is certainly the question that
• 20:57
  Speaker 1: we have spent an inordinate amount of time trying to
• 21:00
  Speaker 1: understand is how how could we be wrong? What could
• 21:04
  Speaker 1: stop mean reversion? What are what are the rational reasons
• 21:09
  Speaker 1: for the US having such a premium valuation relative to
• 21:13
  Speaker 1: the rest of the world. UM And unfortunately, when when
• 21:17
  Speaker 1: we've done that. I've personally, I have found most of
• 21:20
  Speaker 1: the explanations to be very wanting. UM. So you know,
• 21:24
  Speaker 1: one of the most common ones, low interest rates, just
• 21:27
  Speaker 1: doesn't cut the mustard on on multiple different levels. First,
• 21:31
  Speaker 1: there is no provable relationship between interest rates and valuation. Uh. Second,
• 21:37
  Speaker 1: there are any number of other countries that have low
• 21:40
  Speaker 1: interest rates Europe, Japan for forever um, yet they haven't
• 21:44
  Speaker 1: enjoyed high multiples UM. So you you you automatically begin
• 21:48
  Speaker 1: to question the sanity of that statement, the low rates
• 21:54
  Speaker 1: of the justification for high multiples. I think the one
• 21:57
  Speaker 1: where I have perhaps the most sympathy, but still not
• 22:04
  Speaker 1: I don't find overwhelmingly compelling is that the US has
• 22:08
  Speaker 1: um higher quality companies UM. And I think that is
• 22:14
  Speaker 1: in essence true. There are some exceptional businesses that happened
• 22:18
  Speaker 1: to be domiciled in the US, but I simply don't
• 22:22
  Speaker 1: think it justifies the degree of the premium that we
• 22:26
  Speaker 1: witness UM and so I come down still on the
• 22:29
  Speaker 1: side of mean reversion. Yes, it's it's taken a long time,
• 22:33
  Speaker 1: and that's how you end up with cheap markets, right
• 22:35
  Speaker 1: or expensive markets is if they go on for a
• 22:37
  Speaker 1: long time. And Rudy Dawn Bush always used to say,
• 22:40
  Speaker 1: these things go on for longer than you expect and
• 22:42
  Speaker 1: then end faster than you expects. Um. And they've certainly
• 22:45
  Speaker 1: fulfilled the first part of that over over the last decade,
• 22:49
  Speaker 1: where emerging has got cheaper and cheaper and the US
• 22:52
  Speaker 1: has become more and more expensive. UM. So certainly are
• 22:56
  Speaker 1: our faith has been well and truly tested. But as
• 23:00
  Speaker 1: of yet, I haven't found a compelling, sensible explanation that
• 23:06
  Speaker 1: explains that differential. I think it was at Sajen you
• 23:10
  Speaker 1: pend a piece that I've always really liked called the
• 23:14
  Speaker 1: Seven Immutable Laws of Investing. That that's got to be
• 23:17
  Speaker 1: at least a decade old, right, that one was? Yeah,
• 23:22
  Speaker 1: I think I wrote that for GMO. Actually, so it's
• 23:24
  Speaker 1: about a decade old. Tell us how you assembled that list.
• 23:27
  Speaker 1: It's a nice run of severn different bullet points. Will
• 23:31
  Speaker 1: will go over some of them. But what was the
• 23:34
  Speaker 1: process like of putting that list together? It was it
• 23:38
  Speaker 1: was really an exercise in in trying to distill um
• 23:43
  Speaker 1: the experience of myself and many others um into something
• 23:49
  Speaker 1: that was easily digestible. Uh and uh as I realized
• 23:53
  Speaker 1: as I described that I've committed one of the sins
• 23:56
  Speaker 1: I hate, which is kind of the great dumming down
• 23:59
  Speaker 1: of everything. The reduction of anything important to two D
• 24:03
  Speaker 1: forty characters drives me to distraction. And I suddenly struck
• 24:08
  Speaker 1: that the Seven Immutable Laws was an attempt to do
• 24:10
  Speaker 1: exactly that, which is somewhat embarrassing, But it was really
• 24:14
  Speaker 1: about trying to distill the wisdom of a great deal
• 24:19
  Speaker 1: of UM investors past who I had respected, Ben Graham,
• 24:23
  Speaker 1: John Maynard, Kane's Sir John Templeton, Warren Buffett, obviously numerous
• 24:29
  Speaker 1: others UM, and and really come down to a list
• 24:32
  Speaker 1: of things that I would help to be always true
• 24:37
  Speaker 1: UM that if I had to to kind of pass
• 24:40
  Speaker 1: this on to my kids without ever being able to
• 24:42
  Speaker 1: talk to them again, what would I tell them were
• 24:44
  Speaker 1: the kind of the rules they had to follow UM
• 24:48
  Speaker 1: in order to to make sensible investment to suck decisions.
• 24:52
  Speaker 1: So you've mentioned always insist on a margin of safety,
• 24:56
  Speaker 1: which I associate with both Ben Graham and Klarman, who
• 25:00
  Speaker 1: had a book of the same name. Let's talk about
• 25:04
  Speaker 1: rule number two, which I'm gonna assume is channeling John Templeton.
• 25:10
  Speaker 1: This time is never different explain the thinking behind that. Right.
• 25:14
  Speaker 1: So I think that there that was really born out
• 25:17
  Speaker 1: of thinking about our experience of bubbles, and particularly talking
• 25:21
  Speaker 1: with my my former colleague and very good friend Edward Chancellor,
• 25:25
  Speaker 1: who very wonderful book called Devil Takes Behind Most, which
• 25:29
  Speaker 1: is an extraordinary history of speculative mania. UM. And it
• 25:34
  Speaker 1: struck me that looking at his work, looking at Charles
• 25:38
  Speaker 1: Kindelberger's Mania's Panics and crashes, UM, there were an awful
• 25:42
  Speaker 1: lot of similarities to our experience with manias, bubbles and
• 25:49
  Speaker 1: these kinds of environments. UM. The course, the details are
• 25:53
  Speaker 1: always different, UM. But actually there is a core of
• 25:58
  Speaker 1: rhyming within each of these experiences that is always true.
• 26:03
  Speaker 1: And therefore it was indeed Sir John Templeton who said, um,
• 26:08
  Speaker 1: the the foremost dangerous words is at this time is
• 26:12
  Speaker 1: never different. Probably five most dangerous words invested this time
• 26:16
  Speaker 1: is never different. Jeremy Grantham takes a slightly different view, UM,
• 26:21
  Speaker 1: and and said, from a value manager's perspective, the most
• 26:25
  Speaker 1: dangerous word UH this time is is is never different
• 26:30
  Speaker 1: in the in the slightly different way. UM. He points
• 26:32
  Speaker 1: out that he we constantly assume mean reversion um. And
• 26:36
  Speaker 1: perhaps that that that can be an error sometimes um,
• 26:40
  Speaker 1: so that they become pretty pretty dangerous. Whereas everybody seems
• 26:44
  Speaker 1: to believe to me that this time is different is
• 26:47
  Speaker 1: the the usual explanation. So the tech bubble is the
• 26:50
  Speaker 1: prime example. Going through the tech bubble. Oh, you don't
• 26:53
  Speaker 1: understand this time is different because bang bang bang bang bang, um,
• 26:58
  Speaker 1: which it's just it's ever been true. Yet. I didn't
• 27:02
  Speaker 1: understand that shiny phones were going to change the world
• 27:06
  Speaker 1: back then. Um. In fact they did. The Internet did
• 27:09
  Speaker 1: change the world in ways that I couldn't even begin
• 27:11
  Speaker 1: to imagine, but generally not in a highly profitable fashion
• 27:15
  Speaker 1: um and certainly not the fashion that people were pricing
• 27:18
  Speaker 1: in in So to me, remembering that this time is
• 27:23
  Speaker 1: never different is really just reminding ourselves that human experience
• 27:28
  Speaker 1: is sadly not linear. It has to been more cilical.
• 27:33
  Speaker 1: Seth Klarman, whose book you mentioned, The March in the Safety,
• 27:36
  Speaker 1: has a wonderful discussion in it about collacterized bond obligations
• 27:41
  Speaker 1: UM during the early nineties, which have unparently uncanny parallels
• 27:49
  Speaker 1: with the experience with collacterized loan obligations in two thousand,
• 27:56
  Speaker 1: two thousand seven, two thousand and eight um, and you
• 27:59
  Speaker 1: you constantly we find that um, these parallels come back um,
• 28:03
  Speaker 1: and Galbraith had a nice expression which was, um, the
• 28:08
  Speaker 1: world keep coming, and finances the one industry where we
• 28:12
  Speaker 1: keep reinventing the wheel each time in the slightly more
• 28:15
  Speaker 1: unstable fashion, which I kind of like is a summation
• 28:19
  Speaker 1: of most of the kind of problems of finance, but
• 28:23
  Speaker 1: remembering that this time is never different. It is just
• 28:26
  Speaker 1: a reminder that we've seen most of this before. We've
• 28:29
  Speaker 1: seen this movie before. We know how it ends, and
• 28:31
  Speaker 1: it generally doesn't end well. So the asset classes and
• 28:36
  Speaker 1: the circumstances and the specifics may change from cycle to cycle,
• 28:40
  Speaker 1: but it sounds like human nature itself is immutable, exactly right, precisely.
• 28:48
  Speaker 1: So there's a couple of others that that I like,
• 28:50
  Speaker 1: be patient and wait for the fat pitch. That that
• 28:53
  Speaker 1: sounds like you're channeling Warren Buffets. They're a bit exactly that.
• 28:58
  Speaker 1: That is definitely a buffet, is the fat pitch. And
• 29:02
  Speaker 1: Ted Williams and had to learn a lot about baseball
• 29:04
  Speaker 1: to understand that one, which is not easy, as you
• 29:06
  Speaker 1: can tell from my accent. Um. But once they got
• 29:09
  Speaker 1: me to hang of it. I said, oh yeah, I
• 29:10
  Speaker 1: get it. Um really about waiting for those good opportunities.
• 29:14
  Speaker 1: You know that there are long amounts of time when
• 29:17
  Speaker 1: doing nothing is the right thing to do. And that's
• 29:19
  Speaker 1: really hard because people expect their investment managers to be active,
• 29:24
  Speaker 1: to be doing stuff. But there are long periods when
• 29:27
  Speaker 1: there are no fat pitches in which case you shouldn't
• 29:30
  Speaker 1: be doing stuff. Um, don't, don't do something just fit
• 29:34
  Speaker 1: their kind of thing, um And And that can be
• 29:37
  Speaker 1: very hard to to justify, but it allows you to
• 29:42
  Speaker 1: right It allows you to exploit the opportunities when they
• 29:45
  Speaker 1: do come along. So number four is a real challenge
• 29:49
  Speaker 1: because I'm reminded in the scene, uh from the money
• 29:54
  Speaker 1: Python movie Life of Brian where Brian is speaking to
• 29:58
  Speaker 1: the multitudes and says, you're all individuals, You're all different,
• 30:03
  Speaker 1: and every one of them repeats in unison, we are
• 30:06
  Speaker 1: all individuals, we are all different. And and number four
• 30:09
  Speaker 1: is be a contrarian. How challenging is it to be
• 30:14
  Speaker 1: a contrarian with so much career risk and so much
• 30:20
  Speaker 1: peer pressure to do what the crowd is doing. Absolutely,
• 30:25
  Speaker 1: and it's really I think the essence of investing um
• 30:30
  Speaker 1: and you can trace that back to to Ben Graham,
• 30:33
  Speaker 1: the Maynard Kanes, Um. They all have quotes. In fact,
• 30:37
  Speaker 1: every good value investor I think has a quote on
• 30:40
  Speaker 1: the importance of being contrarian UM. And one of the
• 30:44
  Speaker 1: contributions I think UM Jeremy Grantham has has really made
• 30:48
  Speaker 1: to our understanding of that is why it is so
• 30:51
  Speaker 1: hard to do. And there are two different sources of
• 30:55
  Speaker 1: hurdles if you like that we have to overcome. One
• 30:58
  Speaker 1: is is human nature. Human nature tells us that it
• 31:01
  Speaker 1: is warmer and safer in the middle of the herd,
• 31:03
  Speaker 1: and we should probably stay there, um. We don't like
• 31:06
  Speaker 1: to look different with social animals. And then there is
• 31:10
  Speaker 1: on the other the other set of hurdles are really
• 31:12
  Speaker 1: what one would describe as UM, the institutional imperative, and
• 31:15
  Speaker 1: that's really Kane's observation about career risk, which is obviously
• 31:21
  Speaker 1: it is far better for reputation to fail conventionally than
• 31:24
  Speaker 1: to succeed unconventionally UM. And the combination of those two
• 31:28
  Speaker 1: that that innate human desire to be similar to other
• 31:31
  Speaker 1: people and then the overlay of the institutional framework really
• 31:38
  Speaker 1: do make it incredibly hard to be a contrarian. But Ultimately, Uh,
• 31:43
  Speaker 1: this is a Templeton quote. If you want different results
• 31:46
  Speaker 1: from other people, you have to do something different from
• 31:48
  Speaker 1: other people. Um. And so we we we end up
• 31:51
  Speaker 1: there saying, Okay, you you just have to be a contrarian.
• 31:54
  Speaker 1: It doesn't mean you have to be a blind contrarian.
• 31:56
  Speaker 1: Doesn't mean you have to be unthinking. I suggest both
• 32:00
  Speaker 1: to those of foolish. But I think ultimately you have
• 32:03
  Speaker 1: to be prepared to look different if you want to
• 32:06
  Speaker 1: achieve a decent set of investment results, or at least
• 32:10
  Speaker 1: different ones. And that is something that people find incredibly
• 32:13
  Speaker 1: hard to do. So you wrote these in two thousand
• 32:17
  Speaker 1: and eleven. They're published on the GMO side. If you
• 32:20
  Speaker 1: were rewriting this list today, would you change any would
• 32:24
  Speaker 1: you shift the order around? How has a decade altered
• 32:28
  Speaker 1: your perception of this list of seven immutable laws of investing.
• 32:34
  Speaker 1: I'm kind of glad to say I wouldn't rewrite any
• 32:37
  Speaker 1: of them. Um, I'm glad to say the immutable part
• 32:40
  Speaker 1: is still true. Um. I never really thought about the
• 32:44
  Speaker 1: order that they were just kind of I didn't write
• 32:47
  Speaker 1: them in any specific order of importance. Um. And so
• 32:52
  Speaker 1: I think all seven of them are probably as true
• 32:56
  Speaker 1: today as as they were when I wrote them. Um,
• 33:00
  Speaker 1: but I'm glad to say I definitely wouldn't rewrite any
• 33:04
  Speaker 1: of them. Uh. Let's talk a little bit about your
• 33:08
  Speaker 1: role of GMO. What does being on the asset allocation team?
• 33:13
  Speaker 1: They're INTEL, so it's it's my role is is a
• 33:17
  Speaker 1: research role um and and that's one that I I
• 33:20
  Speaker 1: thrive on. M I enjoy and then enjoy is solving puzzles,
• 33:25
  Speaker 1: and to me, investing is perhaps the ultimate puzzle. It's
• 33:30
  Speaker 1: never exactly the same um And there are always uncertainties,
• 33:35
  Speaker 1: and really my job is to sit there and think.
• 33:40
  Speaker 1: My my children asked me. My daughter turned around to
• 33:42
  Speaker 1: me and said, what do you do for a living, Dad?
• 33:44
  Speaker 1: And I said, well, I think, um And she was
• 33:47
  Speaker 1: I don't think enormously enamored with that answer, but it
• 33:51
  Speaker 1: is essentially what I am paid to do. I'm paid
• 33:54
  Speaker 1: to sit here and think about life, the universe and everything,
• 33:57
  Speaker 1: um and really understand end as much of that as
• 34:01
  Speaker 1: I can and make sure that that we are investing
• 34:04
  Speaker 1: in a way that that kind of makes sense. That
• 34:07
  Speaker 1: that reference sounded like a Douglas Adams title. So uh
• 34:12
  Speaker 1: so let me have you. Let me have you think
• 34:14
  Speaker 1: about something that I find a puzzle that I find
• 34:19
  Speaker 1: quite fascinating and challenging, And it has to do with valuations.
• 34:24
  Speaker 1: And the question is this, the world has changed over
• 34:27
  Speaker 1: the past century. Does it make sense to compare valuations
• 34:31
  Speaker 1: of today with those in the nineteen thirties and forties,
• 34:35
  Speaker 1: or or the nineteen eighties and nineties. How has the
• 34:39
  Speaker 1: inherent capital structure of companies, what they need in terms
• 34:43
  Speaker 1: of labor and material changed from I don't know, five
• 34:48
  Speaker 1: ten decades ago versus today's fast light UH to two
• 34:54
  Speaker 1: founders and a laptop and and the Amazon cloud versus
• 35:00
  Speaker 1: ons and tons of steel and factories and thousands of employees.
• 35:04
  Speaker 1: Do we really have the same valuator valuation metrics today
• 35:09
  Speaker 1: that we had early last century. It's an extraordinary good question.
• 35:15
  Speaker 1: I think that there is there is another Bend Graham
• 35:20
  Speaker 1: quote which is effectively um that the only constant is
• 35:25
  Speaker 1: change ah. And it is certainly true, right, And I
• 35:29
  Speaker 1: totally understand that when one's comparing long runs of data,
• 35:33
  Speaker 1: let's say, looking at a chiller kpe UM in the
• 35:38
  Speaker 1: eighties that reflected an environment which was essentially mainly railroads.
• 35:42
  Speaker 1: UM today that does not seem like a terribly useful
• 35:46
  Speaker 1: proxy for anything of any interest. However, I think it
• 35:50
  Speaker 1: is worth pointing out that in the eighties railroads we
• 35:54
  Speaker 1: were cutting edge, right. They were the railroad bone booms
• 35:58
  Speaker 1: of the eighteen fourties and eighteen seven um were the
• 36:02
  Speaker 1: cutting edge of technology. And so I think the stock
• 36:05
  Speaker 1: market obviously evolves over time. It's composition evolves over time,
• 36:10
  Speaker 1: but it is often with a strong technological bias. And
• 36:14
  Speaker 1: there's a wonderful book by a friend of mine called Sanding.
• 36:18
  Speaker 1: His name is Sandy there and the book is called
• 36:20
  Speaker 1: The Engines that Move Markets. He actually worked as the
• 36:23
  Speaker 1: head of research for Templeton a long time ago, UM.
• 36:28
  Speaker 1: And in that book he traces all of these waves
• 36:32
  Speaker 1: of technological innovation from the railroads through to the telegraphs,
• 36:36
  Speaker 1: to the radio, to television, to the automobiles, et cetera, UM.
• 36:41
  Speaker 1: And the one thing that they all have in common
• 36:43
  Speaker 1: is they start off generating enormous returns. People will then
• 36:48
  Speaker 1: drive the prices up to a bubble or something that
• 36:51
  Speaker 1: approximates a bubble. There they effectively extrapolate profitability ento prices
• 36:57
  Speaker 1: UM and eventually that bubble wines because the gains of
• 37:02
  Speaker 1: that technology end up with the consumers, not the producers. Um.
• 37:07
  Speaker 1: And to me, that is why I think that we
• 37:11
  Speaker 1: get these these kind of historical echoes. And it makes
• 37:14
  Speaker 1: some sense to to say, hey, look there are some
• 37:19
  Speaker 1: constants evaluation. That isn't to say every valuation metric is perfect.
• 37:23
  Speaker 1: It isn't. Price to book is a really good example.
• 37:26
  Speaker 1: Price to book gets distorted by things like buy backs um.
• 37:31
  Speaker 1: And so you end up with companies with negative book value,
• 37:33
  Speaker 1: which is essentially economically meaningless um. And so you have
• 37:39
  Speaker 1: to kind of you can't take um these things that
• 37:42
  Speaker 1: face value and say hey, look, uh yeah McDonald's is
• 37:46
  Speaker 1: trading on a negative book value. Yeah, because it's done
• 37:49
  Speaker 1: an enormous amount of buy backs um. And so I
• 37:52
  Speaker 1: think you do have to to apply some some thought
• 37:57
  Speaker 1: and and Beninker, my boss set to me the other
• 37:59
  Speaker 1: day we were having a discussion in a group, and
• 38:02
  Speaker 1: he said, we always reserved the right to use our brains. Uh.
• 38:06
  Speaker 1: And I think that is a sounder things for advice,
• 38:09
  Speaker 1: as I can imagine, we should always reserve the right
• 38:12
  Speaker 1: to use our brains. Um. And there will be times
• 38:15
  Speaker 1: when you you want to question stuff. The role of
• 38:18
  Speaker 1: the stock market itself has changed. The stock market used
• 38:21
  Speaker 1: to be a method of finance and companies. That hasn't
• 38:24
  Speaker 1: been true since UM Really the midnight UM companies do
• 38:30
  Speaker 1: not in general come to the market um to to
• 38:33
  Speaker 1: to raise capital and in equities unless the I p O.
• 38:36
  Speaker 1: Everybody else doesn't, and so the amount of buybacks far
• 38:40
  Speaker 1: outstrips the amount of I p o s, and so
• 38:43
  Speaker 1: what we actually see is negative icuants. So there are
• 38:46
  Speaker 1: differences that it's important to recognize, and one does have
• 38:50
  Speaker 1: to think carefully about the valuation metrics that one chooses
• 38:53
  Speaker 1: to use, but I think a lot of them, and
• 38:56
  Speaker 1: the higher the aggregate level that the more that makes sense.
• 39:00
  Speaker 1: So looking at a Shillo or KP for the aggregate market,
• 39:04
  Speaker 1: I think it's a lot more sensible than trying to
• 39:06
  Speaker 1: look at Apple or Google Amazon's shillape, which I think
• 39:10
  Speaker 1: is pretty meaningless. UM. So I think it does depend
• 39:13
  Speaker 1: on on the level of the analysis and the particular
• 39:18
  Speaker 1: specifics of the analysis. So using one's brain is highly recommended.
• 39:24
  Speaker 1: I can't can't say I argue with any of that.
• 39:26
  Speaker 1: Let let me have you use your brain on another
• 39:30
  Speaker 1: issue that that I've been and I think a lot
• 39:33
  Speaker 1: of people have been perplexed by. And that's the issue
• 39:37
  Speaker 1: of negative interest rates at a lot of industrialized nations.
• 39:43
  Speaker 1: We we briefly source some short term treasuries go negative.
• 39:47
  Speaker 1: United States. What does it mean to see so much
• 39:50
  Speaker 1: of the world dabbling with negative interest rates? And are
• 39:54
  Speaker 1: we going to see this in the United States? It's
• 39:58
  Speaker 1: fascinating right as people central banks from it when they
• 40:02
  Speaker 1: take rates negative. I genuinely don't understand what they're thinking.
• 40:07
  Speaker 1: I can get what you want to take the rates
• 40:09
  Speaker 1: row low if you're a central banker. I do not
• 40:12
  Speaker 1: understand negative of interest rates because negative interest rates are
• 40:15
  Speaker 1: attacks on banks. Now, don't get me wrong, I'm perfectly
• 40:19
  Speaker 1: happy at tax banks. But from a policy response to
• 40:24
  Speaker 1: effectively trying to create an economic stimulus, one of the
• 40:28
  Speaker 1: things I do remember from economics is that the taxes
• 40:31
  Speaker 1: are are a leakage. There are a break on economics,
• 40:34
  Speaker 1: not a not a not a stimulus um. And so
• 40:37
  Speaker 1: therefore relying on negative interest rates to try and boost
• 40:41
  Speaker 1: activity I think is kind of weird. Um. I don't
• 40:45
  Speaker 1: think it makes a great deal of economic sense. Um.
• 40:48
  Speaker 1: I think it also trying to blows up a lot
• 40:50
  Speaker 1: of people's models, because an awful lot of modern day
• 40:54
  Speaker 1: asset pricing for the better or worst takes it its
• 40:58
  Speaker 1: cue from from the interest rate. It's now. As much
• 41:00
  Speaker 1: as I don't think that's particularly sensible, UM, I do
• 41:04
  Speaker 1: acknowledge that a lot of people behave that way. UM.
• 41:06
  Speaker 1: And it does strike me that the negative interest rate
• 41:09
  Speaker 1: could potentially muck up quite a lot of that approach. UM.
• 41:13
  Speaker 1: And so I think it's uh, it's an odd policy
• 41:17
  Speaker 1: with unknown consequences which I do not think should be
• 41:21
  Speaker 1: pursued lightly. UM. As to whether the US is ever
• 41:25
  Speaker 1: going to get there, I have absolutely no idea. UM.
• 41:29
  Speaker 1: If I if I go back twenty years, I used
• 41:32
  Speaker 1: to be one of those people who said our interest
• 41:35
  Speaker 1: rates can't go below zero um, because you know, it
• 41:38
  Speaker 1: seems so unthinkable. Um. And yet I probably should have
• 41:42
  Speaker 1: to go back more than a decade, right, two decades
• 41:44
  Speaker 1: for me to have been saying that. Um. But fast
• 41:47
  Speaker 1: forward and there we are. We we've seen them, so
• 41:51
  Speaker 1: never say never. I guess right, it ain't called the
• 41:54
  Speaker 1: zero bound for nothing, Although I guess maybe you so,
• 41:58
  Speaker 1: so let me ask let me, let me ask you
• 42:02
  Speaker 1: a different policy question. You seem to be somewhat enamored
• 42:07
  Speaker 1: of modern monetary theory, which basically says, stop freaking out
• 42:13
  Speaker 1: over deficits. If the government issues currency and it's it's
• 42:18
  Speaker 1: has control of its own currency and can issue debt
• 42:21
  Speaker 1: that people want to buy, deficits, aren't the end of
• 42:24
  Speaker 1: the world. Tell us a little bit in this election
• 42:28
  Speaker 1: year what you think about modern monetary theory and what
• 42:32
  Speaker 1: it means for how we should be assessing how governments
• 42:36
  Speaker 1: will be interacting with markets. Yeah, I think n m T.
• 42:42
  Speaker 1: Modern monetary theory is UM. That that very um, that
• 42:48
  Speaker 1: that label tends to to get people's tackles rising. Right,
• 42:51
  Speaker 1: it's um. You know, it doesn't matter whether it's it's
• 42:53
  Speaker 1: on the right or the left, and people get very
• 42:55
  Speaker 1: upset and very passionate and start throwing Zimbabwe around is
• 42:59
  Speaker 1: and the hype of inflation of Venezuela and those sorts
• 43:02
  Speaker 1: of things. UM. But actually I think it's that the
• 43:05
  Speaker 1: core of what I perceive of monetary Modern monetary theory
• 43:10
  Speaker 1: is a descriptive model of how the world actually works. UM.
• 43:14
  Speaker 1: And it says that effectively, government don't have to finance
• 43:20
  Speaker 1: their their deficits if, as you say, they are what
• 43:22
  Speaker 1: we call monetarily sovereign, I they issue bonds in a
• 43:26
  Speaker 1: currency which they control. So it is absolutely a description
• 43:32
  Speaker 1: of the US, Japan, and the UK. It is absolutely
• 43:34
  Speaker 1: not a description of the Eurozone, where the country is
• 43:37
  Speaker 1: obviously issue debt in euros which they don't control. That's
• 43:42
  Speaker 1: in the hands of the c D. UM. So I
• 43:45
  Speaker 1: think there is this this kind of common belief that
• 43:49
  Speaker 1: governments are really like households, they have to live within
• 43:53
  Speaker 1: their means um and I think that's just fundamentally false
• 43:57
  Speaker 1: as a paradigm. And I think when you begin to
• 44:00
  Speaker 1: understand the way that government spend and and potentially the
• 44:05
  Speaker 1: reason why the money exists, um, it's really exists as
• 44:09
  Speaker 1: a form of debt settlement. And that is true pretty
• 44:13
  Speaker 1: much as far back as anybody can go. Um. The
• 44:18
  Speaker 1: geld is the word for for guilt and obligation, which
• 44:22
  Speaker 1: is is the the the the historical form of money
• 44:27
  Speaker 1: um and so I think it it's to my mind,
• 44:31
  Speaker 1: um m M T is a much more accurate description
• 44:36
  Speaker 1: of the way the world works, and therefore understanding how
• 44:40
  Speaker 1: the world works, which is ultimately kind of my aim
• 44:42
  Speaker 1: in life is goes back to the topic of on earlier.
• 44:46
  Speaker 1: I'm paid to sit and think and try and understand
• 44:48
  Speaker 1: the world. UM. Well MMT to me, it offers a
• 44:52
  Speaker 1: much better framework for understanding the way the world works
• 44:56
  Speaker 1: than a lot of other economics. And it does one
• 45:00
  Speaker 1: to say that, look, budget deficits are not nearly as
• 45:04
  Speaker 1: problematic as people believe. You know, there's a school of
• 45:08
  Speaker 1: thought that they lead to incredibly high interest rates. Well,
• 45:11
  Speaker 1: just look at the evidence. That's not the case right now,
• 45:14
  Speaker 1: And it hasn't been the case in Japan for a
• 45:16
  Speaker 1: very very long time, where they've run very low interest
• 45:19
  Speaker 1: rates and very big government deficits, and then quite rightly
• 45:23
  Speaker 1: they've had to do that, but it's certainly those deficits
• 45:26
  Speaker 1: haven't led to high interest rates. UM. Then you get
• 45:30
  Speaker 1: people turning around and saying, oh, well, printing money to
• 45:33
  Speaker 1: the finance budget deficits as inflationary, and you're like, really,
• 45:37
  Speaker 1: where's the evidence for that. Um. First of all, governments
• 45:41
  Speaker 1: don't actually worry about printing money, is how they've always acted.
• 45:46
  Speaker 1: You have to print money in order to spend it, um,
• 45:49
  Speaker 1: and to get it into circulation before people can even
• 45:51
  Speaker 1: pay their taxes. UM. So there's kind of a whole
• 45:55
  Speaker 1: series of myths that people have UM that are very
• 45:59
  Speaker 1: much caught up with the analogy of governments and households.
• 46:03
  Speaker 1: And it's certainly true for households they cannot live sustainably
• 46:08
  Speaker 1: beyond their means, but it is not the case for government. Um.
• 46:12
  Speaker 1: They can. They can as long as they meet the
• 46:15
  Speaker 1: criteria we we talked about earlier, that they are absolutely
• 46:19
  Speaker 1: capable of going out and spending. It's it's very interesting
• 46:22
  Speaker 1: that today we see a much broader acceptance of that
• 46:26
  Speaker 1: in the response to the various corona outbreaks around the
• 46:30
  Speaker 1: world and here in the UK, where government is underwriting
• 46:34
  Speaker 1: percent of people's wages um and and that would have
• 46:37
  Speaker 1: been unthinkable. Uh. You know, we saw the conservative government,
• 46:42
  Speaker 1: right we we saw what happened post financial crisis when
• 46:45
  Speaker 1: the Wistarians were in control and we're more focused about
• 46:50
  Speaker 1: balancing budgets than helping the economy recover. That didn't end
• 46:55
  Speaker 1: especially well in the UK or the United States? Did it?
• 47:00
  Speaker 1: Not exactly right? In the US you had the slowest
• 47:03
  Speaker 1: and weakest recovery ever um and in the UK it
• 47:06
  Speaker 1: was a total disaster. We we essentially didn't have any recovery.
• 47:10
  Speaker 1: Um and so the the Austerians and the kind of
• 47:13
  Speaker 1: advocates of sound finance, which is the balance you must
• 47:17
  Speaker 1: balance the budget, etcetera. I think renolds with sensible evidence
• 47:23
  Speaker 1: based economics, and I'm a big fan of evidence based anything,
• 47:26
  Speaker 1: evidence based medicine, evidence based investing, evidence based economics. One
• 47:31
  Speaker 1: should always mark one's beliefs to market. Check the real world,
• 47:36
  Speaker 1: see how it looks. So last quote of yours before
• 47:40
  Speaker 1: we get to our speed rounds, and I want you
• 47:43
  Speaker 1: to expound on this. Don't equate happiness with money. Materialistic
• 47:48
  Speaker 1: pursuits are not a path to sustainable happiness. Explain. So. Yeah,
• 47:56
  Speaker 1: a long time ago, UM, I wrote a couple of
• 47:59
  Speaker 1: notes on on how to be happy. UM. And then
• 48:02
  Speaker 1: it just struck me as something that I spent a
• 48:05
  Speaker 1: long time working at investment branks at that stage, UM,
• 48:09
  Speaker 1: and I kind of was slightly worried that I looked
• 48:12
  Speaker 1: into people's eyes and it was like staring into the
• 48:14
  Speaker 1: zombie's eyes that they have. The lights were on, but
• 48:16
  Speaker 1: nobody was home, um, and they seemed dead on the inside.
• 48:20
  Speaker 1: And I really couldn't fathom how that could happen. UM.
• 48:25
  Speaker 1: And I began to do some research on on happiness
• 48:29
  Speaker 1: and the science of happiness. UH, and it turns out
• 48:32
  Speaker 1: there there are a number of people who have thought
• 48:34
  Speaker 1: about happiness UM. And one of the big difficulties is
• 48:38
  Speaker 1: that people tend to associate happiness with with wealth or
• 48:44
  Speaker 1: or income. And don't get me wrong, a certain level
• 48:46
  Speaker 1: of income is necessary, UM, But beyond that level of
• 48:50
  Speaker 1: kind of that threshold, it really isn't obvious that the
• 48:54
  Speaker 1: greater increases in wealth and income lead people to be happy. UM.
• 48:59
  Speaker 1: For the vast majority of people trapped in poverty, of course,
• 49:02
  Speaker 1: an improvement in their income would help them. But for
• 49:06
  Speaker 1: let's say, you know, the top uh ten percent of
• 49:09
  Speaker 1: the population, UM, increasing their material um worth is it's
• 49:14
  Speaker 1: probably not going to have a great deal of impact
• 49:16
  Speaker 1: on on their happiness. And I think that the problem
• 49:19
  Speaker 1: a lot of people have is UM what we call
• 49:22
  Speaker 1: headon hedonic adaptation, which is you get used to stuff
• 49:26
  Speaker 1: very quickly. UM. So you get a new car and
• 49:30
  Speaker 1: you really love it and it feels great, but within six, three,
• 49:34
  Speaker 1: twelve months, whatever it might be, it's just your car. Right,
• 49:37
  Speaker 1: your kids are in the back, they've scuffed up the
• 49:39
  Speaker 1: back seats, they've put their muddy boots on it, the
• 49:41
  Speaker 1: dog's been in the boot, and then it's really not
• 49:43
  Speaker 1: a new car, and it's devalued quite a lot in
• 49:46
  Speaker 1: your own eyes, let alone. It's it's economic worth um.
• 49:50
  Speaker 1: And so we we were on this what they call
• 49:53
  Speaker 1: the hedonic treadmill UM, that we we adapt very fast
• 49:57
  Speaker 1: to our environment, on our material all ownership. UM. And
• 50:02
  Speaker 1: this rang through with me was when I was young,
• 50:04
  Speaker 1: I spent a long time traveling the world, and some
• 50:08
  Speaker 1: of the poorest people were amongst the happiest I've ever met.
• 50:11
  Speaker 1: I was traveling in Thailand and there were people who
• 50:14
  Speaker 1: essentially had very very little, and yet they were absolutely
• 50:18
  Speaker 1: some of the nicest, friendliest people I've ever met, and
• 50:20
  Speaker 1: they were willing to share what little they had with me.
• 50:22
  Speaker 1: A stranger is just traveling through their village. UM. And
• 50:26
  Speaker 1: I started reading both science and then the dial Arma
• 50:30
  Speaker 1: on on happiness, and the dial Arma is an interesting
• 50:33
  Speaker 1: man because he very obviously a very spiritual individual, but
• 50:36
  Speaker 1: one who is absolutely certain that if science proved something
• 50:40
  Speaker 1: that he believes to be wrong, that he will update
• 50:42
  Speaker 1: his beliefs UM. And there I found a lot of
• 50:47
  Speaker 1: wisdom about UM. The way to be happy is not
• 50:52
  Speaker 1: surrounding oneself with materialistic possessions, but experiences. And for me
• 50:58
  Speaker 1: that that really rings true. And I think too many
• 51:00
  Speaker 1: people focused far too much on on money, UM and
• 51:05
  Speaker 1: materialistic pursuits rather than thinking about what might make them,
• 51:09
  Speaker 1: UM a happier individual. Tom Gilovich, I know, has written
• 51:14
  Speaker 1: some research that echoes exactly what you're saying. Experiences are
• 51:19
  Speaker 1: far more lasting and social than mirror objects. So I
• 51:23
  Speaker 1: know I only have you for a limited yep, I
• 51:26
  Speaker 1: know I only have you for a limited amount of time.
• 51:28
  Speaker 1: Let's jump to our speed round. Um. Normally these are
• 51:31
  Speaker 1: ten questions, but given our circumstances, we're going to keep
• 51:35
  Speaker 1: them to five. Uh. Tell us what you are watching today?
• 51:39
  Speaker 1: What are you streaming on Netflix or any other service?
• 51:43
  Speaker 1: What are you podcasting or listening to? I am something
• 51:47
  Speaker 1: of a luddite. I confess I'm probably much more likely
• 51:50
  Speaker 1: to be found reading a book than that I am
• 51:52
  Speaker 1: watching television. But I have to say on Netflix, I
• 51:56
  Speaker 1: did thoroughly enjoy Stranger Things. That to me was a
• 52:00
  Speaker 1: very well made and entertaining program. If you like Stranger Things,
• 52:05
  Speaker 1: let me recommend Electric Dreams. I think that's Amazon Prime, UM,
• 52:11
  Speaker 1: but it's a similar concept. We'll see, We'll see if
• 52:13
  Speaker 1: you like that. Early mentors Early mentors who influenced your career.
• 52:21
  Speaker 1: Albert Edwards above and beyond all else. My my we
• 52:25
  Speaker 1: spent scotsh nearly eighteen years working together, I think, um
• 52:28
  Speaker 1: and he had a huge impact on me from when
• 52:32
  Speaker 1: I was joined the team he was on when I
• 52:35
  Speaker 1: was a junior economists way back and all those years ago. UM,
• 52:38
  Speaker 1: I'm watching the way that Albert's worked and thought really
• 52:43
  Speaker 1: did define the way that today I work and think.
• 52:48
  Speaker 1: Quite interesting. You mentioned you're spending a lot of time reading.
• 52:51
  Speaker 1: Tell us some of your favorite books, fiction, non fiction,
• 52:55
  Speaker 1: finance or anything else. What have you been enjoying and
• 52:59
  Speaker 1: what are you looking forward to reading. I try to
• 53:02
  Speaker 1: read fairly widely. Um. I think one can often find
• 53:05
  Speaker 1: insights into all sorts of problems um from from very
• 53:09
  Speaker 1: different perspectives. But I think my favorite investment book is
• 53:14
  Speaker 1: probably SETH Carman's Marginal Safety, which we've we've mentioned earlier.
• 53:18
  Speaker 1: I think there is a tremendous amount of value in there.
• 53:22
  Speaker 1: Outside of that, I'm currently reading a book on biomechanics,
• 53:25
  Speaker 1: um I. I my big passion outside investing is is taekwondo,
• 53:29
  Speaker 1: and I was fortunate enough last week to take part
• 53:32
  Speaker 1: in the seminar with one of the Russian grand masters,
• 53:36
  Speaker 1: Grandmaster Kang and he's a big exponent of of understanding
• 53:41
  Speaker 1: biomechanics to to improve our taekwondo performance. And so I'm
• 53:45
  Speaker 1: trying to understand how physics applies to the human body
• 53:49
  Speaker 1: right now. Huh, give us one other. What else are
• 53:52
  Speaker 1: you reading and enjoying? Um? What else am I reading? Enjoy?
• 53:56
  Speaker 1: I actually enjoy? Really my guilty pleasure is airport thriller,
• 54:00
  Speaker 1: as I will read almost any airport thriller when I'm
• 54:04
  Speaker 1: stuck on a plane. I will quite happily dig into
• 54:06
  Speaker 1: pretty much any thriller. Um. So the lower brower, the better.
• 54:12
  Speaker 1: Give us an author's name of these low brow thrillersh me,
• 54:17
  Speaker 1: I I kind of I do like Mark Billingham. He
• 54:21
  Speaker 1: writes a series of detective novels that I find most enjoyable.
• 54:27
  Speaker 1: What sort of advice would you give a recent college
• 54:29
  Speaker 1: grad who was thinking about going into the investment field.
• 54:34
  Speaker 1: Don't do it, Go and do something future with your life. No.
• 54:42
  Speaker 1: I look, I think that the investing needs bright, sensible people.
• 54:47
  Speaker 1: But I kind of think there's an awful lot else
• 54:49
  Speaker 1: that people we need in this world, and investing is
• 54:53
  Speaker 1: probably not the highest and best pursuit. Um. I think
• 54:56
  Speaker 1: far too many people who go into investing are kind
• 54:59
  Speaker 1: of linded by the dollars um and so I think,
• 55:03
  Speaker 1: go and become a doctor or an engineer or something
• 55:05
  Speaker 1: that might actually help humanity. And our final question, what
• 55:11
  Speaker 1: do you know about your chosen fields of investing today
• 55:15
  Speaker 1: that you wish you knew thirty years ago when you
• 55:17
  Speaker 1: were first getting started. Oh man, that's such a good question,
• 55:22
  Speaker 1: I think. Um, I wish I knew not to be
• 55:25
  Speaker 1: so confident. Um My. My my very first job was
• 55:30
  Speaker 1: as an ex strategist and I had an incredibly humbling
• 55:34
  Speaker 1: lesson where I UM. I recommended a position that was
• 55:38
  Speaker 1: short the Swedish corona um based on some very bad
• 55:42
  Speaker 1: economic analysis that I've done. It turned out eventually to
• 55:45
  Speaker 1: be correct. But in the first week that we had
• 55:47
  Speaker 1: that trade on UM, the head of the four ex
• 55:50
  Speaker 1: division told me we lost more money in that on
• 55:53
  Speaker 1: that trade than I made in an entire year. Now
• 55:56
  Speaker 1: I was a graduate, so I didn't make a huge amount,
• 55:58
  Speaker 1: but it was an incredibly humbling experience. Uh. And I
• 56:01
  Speaker 1: think the older, again, the less certain I am about
• 56:04
  Speaker 1: almost everything, um, which is I'm not sure it's a
• 56:07
  Speaker 1: good thing or not, but certainly I wish the younger
• 56:10
  Speaker 1: me had not been quite as arrogant and um confident
• 56:14
  Speaker 1: as as I was. We have been speaking with James Montier.
• 56:18
  Speaker 1: He is the He is a member of the GMO
• 56:22
  Speaker 1: Asset Allocation Team. He is the author of such books
• 56:26
  Speaker 1: as Behavioral Investing, A Practitioner's Guide to Implying Behavioral Finance,
• 56:32
  Speaker 1: The Little Book of Behavioral Investing, and Value Investing, Tools
• 56:36
  Speaker 1: and Techniques for Intelligent Management. If you enjoy this conversation, well,
• 56:41
  Speaker 1: be sure to look up an Inch or down an
• 56:43
  Speaker 1: Inch on Apple iTunes and you could see any of
• 56:45
  Speaker 1: the prior three hundred such conversations we've had before. We
• 56:49
  Speaker 1: love your comments, feedback and suggestions right to us at
• 56:53
  Speaker 1: m IB podcast at Bloomberg dot net. I would be
• 56:56
  Speaker 1: remiss if I did not thank the crack staff that
• 56:58
  Speaker 1: helps us put together these conversations each week. Charlie Volmer
• 57:02
  Speaker 1: is my audio engineer. Michael Batnick is my head of research.
• 57:05
  Speaker 1: Attica val Bron is our project manager. Michael Boyle is
• 57:09
  Speaker 1: my producer. I'm Barry Retolds. You've been listening to Masters
• 57:14
  Speaker 1: in Business on Bloomberg Radio