James Montier’s Laws of Investing

“The financial industry has perfected the art of turning the simple into the complex, and in doing so managed to extract fees for itself!” – James Montier

GMO is one of the largest and most respected investment managers in the asset management industry. I’ve had the pleasure of hearing one of their founders, Jeremy Grantham, speak at a conference and it was one of the most coherent speeches I have heard on how we should view the investment landscape.

He is able to take complex subjects and make them easier to understand, which I feel it the hallmark of the truly great investors.

Grantham’s quarterly letters are a must read for many in the industry for his depth of knowledge and clear and concise advice. He is also a member of my all-time contrarian investment team.*

James Montier is a member of the GMO investment team and I also consider his thoughts a must read. He focuses a lot on the behavior of investors, which is an area I’m particularly interested in.

James came out with a piece a couple years ago that I recently revisited called The Seven Immutable Laws of Investing.

Here they are along with some of his better comments on each. Enjoy.

1. Always Insist on a Margin of Safety
When investors violate Law 1 by investing with no margin of safety, they risk the prospect of the permanent impairment of capital

2. This time is Never Different
…when assessing the “this time is different” story, it is important to take the widest perspective possible.

3. Be Patient and Wait for the Fat Pitch
Many investors seem to suffer from an “action bias” – a desire to do something. However, when there is nothing to do, the best plan is usually to do nothing.

4. Be Contrarian
…you will be buying when others are selling and asset are cheap, and selling when others are buying and assets are expensive.

5. Risk is the Permanent Loss of Capital, Never a Number
The permanent impairment of capital can arise from three sources: 1) valuation risk – you pay too much for an asset; 2) fundamental risk – there are underlying problems with the asset you are buying (aka value traps); 3) financial risk – leverage.

6. Be Leery of Leverage
Leverage can limit your staying power and transform a temporary impairment (i.e., price volatility) into permanent impairment of capital.

7. Never Invest in Something You Don’t Understand
This seems to be just good old, plain common sense. If it seems too good to be true, it probably is.


Further Reading:
John Templeton’s 16 Rules For Investing Success
My Common Sense Investment Rules

*Here’s my all-time contrarian investor starting 5: Warren Buffett at PG, Jeremy Grantham at SG, John Templeton at SF, Charlie Munger at PF, and Julian Robertson at C.  Also, David Swensen & Howard Marks would come off the bench with Benjamin Graham as owner and GM.  And yes, I spent way too much time coming up with this list.


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