James Montier on Applying the Seven Immutable Laws of Investing

In 2011, value investor James Montier, a member of GMO’s asset allocation team, wrote the widely cited piece The Seven Immutable Laws of Investing. A year later, we interviewed James about the seven laws, as applied to the European financial crisis raging at the time. The conversation is packed with James’s timeless wisdom on investing.

James is author of Value Investing and The Little Book of Behavioral Investing.

The following transcript has been edited for space and clarity.

The Manual of Ideas: How did you become interested in behavioral finance and value investing?

James Montier: It all started way back, well over twenty years ago when I was at university. One of my tutors was concerned that I had too much faith in the classical approach of economics, and suggested I read some papers by some of the earliest advocates of the behavioral approach, and I was smitten. When I actually starting working in markets the first paper I wrote was on excessive volatility in the bond markets (i.e., the fact that the long bond moves more than is justified by the change in future short rates). I returned regularly to the themes of behavioral finance many times over the years, but in the period of the TMT bubble I got really interested in applying the insights of psychology to investment (what I call behavioral investing) The more I understood about the behavior mistakes to which we are all prone, the more I found myself naturally drawn to value investing as a way of mitigating those mistakes.

MOI: You have been a member of GMO’s asset allocation team since joining the firm in 2009. What research topics are you focused on at GMO?

Montier: I’m one of the portfolio managers in the asset allocation department. My interest is in unconstrained global asset allocation, effectively a value-based approach to multi-asset allocation. We are a very research driven organization; so all the portfolio managers are highly involved in the research. My work these days covers a wide range of topics from high-level ideas spanning philosophy, process and construction, to investigating forecast robustness and down to individual trade ideas like European dividend swaps. I also write white papers occasionally on investment topics that pique my interest such as tail risk protection.

MOI: In The Little Book of Behavioral Investing, you observe that we all seem to have a “bias blind spot.” Could you explain this concept, and what can investors do to eliminate or mitigate this weakness?

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