Post on 09-Apr-2018
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White swans, revulsion and value
James MontierGlobal Strategist
+44 207 762 5872
james.montier@sgcib.com
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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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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Shareholders equity as % of total liabilities
0
10
20
30
40
50
60
70
Non-financials Banks
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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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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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Why buy value? Protection against error and pooroutcomes
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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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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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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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