BROADCASTS.com

In Episode 107 we welcome the great James Montier. The chat starts on the topic of James\u2019 questionable sartorial choices. He tells us he\u2019s \u201calways been a fan of dressing badly.\u201d But the guys quickly jump in with Meb noting how James has generally been seeing the world as expensive over the last few years. Has anything changed today?\nJames tells us no; by in large, we\u2019re still trapped in this world where, frankly, you\u2019re reduced to this game of \u201cpicking the tallest dwarf.\u201d In general, every asset is expensive compared to normal. He summarizes, telling us \u201cthere really is a serious challenge to try to put together an investment portfolio that\u2019s going to generate half-decent returns on a forward-looking basis.\u201d\nMeb digs into, focusing on James\u2019 framework for thinking about valuation, specifically, as a process.\nJames starts from accounting identities. There are essentially four ways you get paid for owning an equity: a change in valuation, a change in profitability, some growth, and some yield.\xa0James fleshes out the details for us, discussing time-horizons of these identities. One of the takeaways is that we\u2019re looking at pretty miserable returns for U.S. equities.\nJames notes that we now have the second highest CAPE reading ever. Or you could look at the median price of the average stock \u2013 the price-to-sales ratio has never been higher. Overall, the point is to look at many valuation metrics and triangulate, so to speak. When you do, they\u2019re all pretty much saying the same thing. James finishes by telling us that from his perspective, U.S. equities appear obscenely expensive.\xa0\nMeb takes the counter position, asking if there\u2019s any good argument for this elevated market. Is there any explanation that would justify the high values and continued investment?\nJames spends much time performing this exact exercise, looking for holes. He tells us that most people point toward \u201clow interest rates\u201d as a reason why this valuation is justified. But James takes issue with this. From a dividend discount model perspective, James doesn\u2019t think the discount rate and the growth rate are independent. He suggests growth will be lower along with lower rates. He goes on to discuss various permutations of PE and other models, noting that there\u2019s no historical relationship between the Shiller PE and interest rates.\nMeb comments how so many famous investors echo \u201clow rates allow valuations to be high.\u201d But this wasn\u2019t the case in Japan. Meb then steers the conversation toward advisors who agree that U.S. stocks are expensive yet remain invested. Why?\nWhat follows is a great discussion about what James calls the \u201cCynical Bubble.\u201d People know they shouldn\u2019t be investing because U.S. stocks are expensive, but investors feel they must invest. If you believe you can stay in this market and sell out before it turns, you\u2019re playing the greater fool game. James tells us about a game involving expectations \u2013 it\u2019s a fun part of the show you\u2019ll want to listen to, with the takeaway being how hard it is to be one step ahead of everyone else.\nNext, Meb brings up \u201cprocess\u201d as James has written much about it. James tells us that process is key. Professional athletes don\u2019t focus on winning \u2013 they focus on process, which is the only thing they can control. This is a great part of the interview which delves into process details, behavioral biases, how to challenge your own views, and far more. James concludes saying \u201cProcess is vitally important because it\u2019s the one thing an investor can control, and really help them admit that their own worst enemy might be themselves.\u201d\nThere\u2019s plenty more in this great episode: James\u2019s answer to whether we\u2019re in a bubble, and if so, what type\u2026 market myths that people get wrong involving government debt\u2026 and of course, James\u2019 most memorable trade. This one was a loser that got halved\u2026then halved again\u2026then again\u2026then again\u2026\nHow did James get it so wrong? Find out in Episode 107.\nLearn more about your ad choices. Visit megaphone.fm/adchoices