James Montier from Grantham, Mayo van Otterloo was interviewed in Barron’s over the weekend. Montier seems to always be bearish, certainly almost always bearish. The obvious criticism of a perma bear is that they are wrong the vast majority of the time. I believe the utility to a smart perma bear is that they can articulate the prevailing bear base quite eloquently. There is always a bear case (there’s always a bull case) and taking the time to understand it can minimize the odds of getting blindsided.
These days, Montier appears to be concerned about valuations and the heavy hand that central banks have played in the markets in recent years. He believes mean reversion is coming soon while his boss, Jeremy Grantham thinks it could take 20 years.
He also unloads on passive investing saying that with valuations so high it isn’t investing it is speculating.
When asked how investors should approach markets today Montier said;
You build a robust portfolio that can survive lots of different outcomes—a world where Jeremy is right and it takes 20 years for mean reversion to happen, or one where I’m right and the markets revert considerably faster.
This could mean anything from being very active to allocating across many asset classes (more than just equities and bonds) to a combo of both. I would also add avoiding, or at least being underweight, obviously risky parts of the market. Montier appears to think that applies to domestic equities, GMO favors emerging market equities with a smaller allocation to foreign developed and no domestic per the article. I view the obvious risk now as being in long term interest rates. I don’t know when or if rates will go meaningfully higher but rates have been well below the modern normal range for many years and any sort of comeuppance will devastate anyone who is unprepared. There are many ways to get decent yield without taking interest rate risk.
I give a little weight to the equity risk that Montier discusses because it is easier for most investors to understand that equities have bear markets, we just had one ten years ago but it’s been 36 years since there was a true bond bear market, there have only been a few blips along the way and there will be investors who will not understand how much bonds can go down…if it ever happens.
Montier also offers the following;
A sensible portfolio today has a sizable amount of dry powder: T-bills, bonds, TIPS [Treasury inflation-protected securities]. You have to say: “Look, I know cash is giving me a lousy return, but it has an option value that comes in when there are dislocations in markets.”
This is a difficult concept for many investors, but there is tremendous value in cash and cash proxies in terms of opportunity and defensive properties. The push back on opportunity is being emotionally capable of buying when others are fearful. Even only doing it every so often will help a portfolio.
Finally, I’m not as down on indexing as Montier. The idea of indexing being investing without price discovery (a quote from Jesse Felder) rings mostly true but it can still work using the time horizon that Montier himself cites (30-40 years) even if a top is nigh. In reality, very few people truly invest passively, they use indexed products in an active strategy.