The Investor's Shelf — one book
Value Investing: Tools and Techniques for In

Value Investing: Tools and Techniques for Intelligent Investment

James Montier
2009
T2 414 pages · about 6h 54m to read OL15499114Wgoodreads

Montier applies behavioural evidence to a value investing process.

Summary

Montier, a strategist who worked at Societe Generale and later GMO, collected his research notes into a book combining behavioural finance with value investing practice. It is organised in sections on why everything you learned in business school is wrong, the behavioural foundations of value investing, the private equity and short-selling applications, and the evidence.

His attacks on standard finance are direct. He argues that the capital asset pricing model is empirically refuted and should not be used to set discount rates, that beta does not measure risk in any sense investors care about, that risk is the permanent impairment of capital rather than volatility, and that discounted cash flow models are so sensitive to inputs that they produce whatever answer the analyst wanted. He proposes reverse-engineered valuation and simple screens instead.

The behavioural material covers overconfidence, confirmation bias, the tendency to seek more information rather than better information, and the specific institutional pressures that prevent professional investors from acting on value criteria: career risk, benchmark tracking and the requirement to explain each position.

He also presents empirical work on quality and value screens, on short-selling candidates identified through accounting red flags and the C-score, and on the Graham net-net approach applied to modern markets.

The book is a collection of research notes and it repeats itself. Montier is combative and states positions more strongly than the evidence sometimes supports, and the material was written between 2005 and 2009, so the market context is specific. The behavioural and institutional analysis is the most durable part.

Key takeaways 7

  1. Risk is the permanent impairment of capital rather than volatility, and using volatility as a risk measure produces portfolios that avoid the wrong thing.
  2. The capital asset pricing model is empirically refuted and beta does not measure anything an investor should care about.
  3. Discounted cash flow models are so sensitive to their inputs that they return whatever answer the analyst intended, which makes them a rhetorical device rather than an analysis.
  4. Professional investors cannot act on value criteria because career risk, benchmark tracking and the requirement to justify each position all penalise being early and different.
  5. Investors seek more information rather than better information, which raises confidence without improving accuracy.
  6. Simple screens combining value and quality criteria outperform elaborate analysis, because the elaboration adds noise and confidence rather than information.
  7. Accounting red flags including earnings manipulation indicators identify short candidates more reliably than valuation alone does.

Who should read it

Value investors who want behavioural finance connected directly to practice and a sustained attack on the standard finance toolkit.

Where it sits in the reference 3

Philosophy
Styles
Styles

Who recommended it 1 · 1 direct

Chai with Pabrai bookshelf — Investing and Capital Allocation

Similar books 6

Chosen by shared topics, the entries that hold them, and the people who recommended both.

Contrarian Investment Strategies
Contrarian Investment StrategiesDavid Dreman
The Education of a Value Investor
The Education of a Value InvestorGuy Spier
The Most Important Thing Illuminated
The Most Important Thing IlluminatedHoward Marks
Investing the Templeton Way
Investing the Templeton WayLauren Templeton, Scott Phillips
Mastering the Market Cycle: Getting the Odds
Mastering the Market Cycle: Getting the Odds on Your SideHoward Marks
Reminiscences of a Stock Operator
Reminiscences of a Stock OperatorEdwin Lefevre