cima 2009 montier presentation

8/8/2019 CIMA 2009 Montier Presentation

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White swans, revulsion and value

James MontierGlobal Strategist

+44 207 762 5872

[email protected]

February 2009


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1

Volatility: not unprecedented nor unpredictable


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2

Not a Black Swan

Black Swans

Unpredictable

Massive Impact

Ex-post rationalization

Predictable Surprise

At least some were aware ofthe problem

The problem gets worse overtime

Eventually explodes into crisis

Five impediments to recognising predictable surprises:

(i) Over-optimism(ii) The illusion of control(iii) Self-serving bias(iv) Myopia(v) Change blindness


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3

Minsky/Kindleberger framework for bubbles

Displacement

Credit Creation

Euphoria

Critical Stage/Financial Distress

Revulsion


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4

Debt is closer to revulsion (BAA spread)

0

1

2

3

4

5

6

7

8

Jan-25

Jan-28

Jan-31

Jan-34

Jan-37

Jan-40

Jan-43

Jan-46

Jan-49

Jan-52

Jan-55

Jan-58

Jan-61

Jan-64

Jan-67

Jan-70

Jan-73

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Jan-09


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Valuation - Graham and Dodd PE (US)

Source: SG Equity Research

0

10

20

30

40

50

60

1881

1885

1889

1894

1898

1903

1907

1911

1916

1920

1925

1929

1934

1938

1942

1947

1951

1956

1960

1964

1969

1973

1978

1982

1987

1991

1995

2000

2004

2009


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Valuations determine long run returns (% p.a. real)

0

1

2

3

4

5

6

7

8

9

33-18.5 18.5-15.7 15.7-12 12-5

PE Range


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UK Graham and Dodd PE

0

5

10

15

20

25

30

35

Jan-37

Jan-40

Jan-43

Jan-46

Jan-49

Jan-52

Jan-55

Jan-58

Jan-61

Jan-64

Jan-67

Jan-70

Jan-73

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Jan-06

Jan-09


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What would Ben think? (% passing)

17228931,3,6 and G&D PE =7% over 10y

2635241720Total debt 2

7270433838Total debt < 2/3 of TBV

0030.40Price < 2/3 NCA

1015931Price < 2/3 TBV

6082697237DY>2/3 of AAA

10415108PE < 40% of Peak PE

6682585946EY>(2*AAA)

AsiaJapanUKEuropeUSCriteria


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Number of Stocks passing our Short criteria(P/S>2, C score =5)

0

5

10

15

20

25

30

35

40

45

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

current

Europe

US


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10

Shareholders equity as % of total liabilities

0

10

20

30

40

50

60

70

Non-financials Banks


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11

Long-term US financials price to book

0

0.5

1

1.5

2

2.5

3

3.5

1927

1930

1933

1936

1939

1942

1945

1948

1951

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008


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Beware book value

0

200

400

600

800

1000

1200

1400

1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937

Book value halved


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A bias against value? Does expensive wine taste better?


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The earnings cycle S&P500

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

1950

1952

1955

1957

1960

1962

1965

1968

1970

1973

1975

1978

1981

1983

1986

1988

1991

1993

1996

1999

2001

2004

2006


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15

What if the 1930s repeated? (S&P500)

10

20

30

40

50

60

70

80

90

1997

1998

1998

1999

1999

2000

2001

2001

2002

2002

2003

2003

2004

2005

2005

2006

2006

2007

2008

2009

2009

2009

2010

2010

2011

If the 1930s

experience

was to

hold today


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16

Why buy value? Protection against error and pooroutcomes


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17

Indiscriminate selling Performance across G&D PEdeciles (%) 2008

-50

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

Value 2 3 4 5 6 7 8 9 Glamour


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Value in the Great Depression (% p.a.)

-45.0

-40.0

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

Value Growth Market

B/P

D/Y


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The dark side of emotion: the psychology of bear markets

0

10

20

30

40

50

60

70

80

90

No invest Invest and lost Invest and won

Target patients Normal players Patient controls


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No sign of learning: the longer it lasts, the worse we get

40

45

50

55

60

65

70

75

80

85

90

1st 5 2nd 5 3rd 5 4th 5

Target patients Normals Patient controls


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Equities are a long duration asset contribution to valuefrom (%)

0

10

20

30

40

50

60

70

80

1st 3 years Next 5 years Long term


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22

ADHD and stock holding periods

Source: NYSE

0

1

2

3

4

5

6

7

8

9

10

1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005


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24

Sources of cheap insurance (Index linked yields TIPS)

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Sep-00

Jan-01

May-01

Sep-01

Jan-02

May-02

Sep-02

Jan-03

May-03

Sep-03

Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09


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Gold

F M A M J J A S O N D J F M A M J J A S O N D J600

650

700

750

800

850

900

950

1000

1050


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Dividend swapsWorld dividends discounts- 2008 = basis 100

0

10

20

30

40

50

60

70

80

90

100

2008

2009

2010

2011

2012

2013

2014

2015

Year

STOX5E_X SP500 US great depression


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Top decile fund managers Performance in...

-20

-18

-16

-14

-12

-10

-8

-6

-4

-2

0

Worst 1 year Worst 3-years

Source: Brandes Institute


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Percentage of long-term top performers in lowerperformance deciles100

0

20

40

60

80

Decile 6 Decile 7 Decile 8 Decile 9 Decile 10

Quarterly 1-year 3-yearSource: Brandes Institute


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Performance around hiring and firing decisions(%)

-10

-5

0

5

10

15

-3 to 0 -2 to 0 -1 to 0 0 0 to 1 0 to 2 0 to 3

Hired

Fired

Source: Goyal and Wahler


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