Value Investing: Tools and Techniques for Intelligent Investment

by James Montier

"As with his weekly column, James Montier's Value Investing is a must read for all students of the financial markets. In short order, Montier shreds the 'efficient market hypothesis', elucidates the pertinence of behavioral finance, and explains the crucial difference between investment process and investment outcomes. Montier makes his arguments with clear insight and spirited good humor, and then backs them up with cold hard facts. Buy this book for yourself, and for anyone you know who cares about their capital!"
―Seth Klarman , President, The Baupost Group LLC The seductive elegance of classical finance theory is powerful, yet value investing requires that we reject both the precepts of modern portfolio theory (MPT) and pretty much all of its tools and techniques. In this important new book, the highly respected and controversial value investor and behavioural analyst, James Montier explains how value investing is the only tried and tested method of delivering sustainable long-term returns. James shows you why everything you learnt at business school is wrong; how to think properly about valuation and risk; how to avoid the dangers of growth investing; how to be a contrarian; how to short stocks; how to avoid value traps; how to hedge ignorance using cheap insurance. Crucially he also gives real time examples of the principles outlined in the context of the 2008/09 financial crisis. In this book James shares his tried and tested techniques and provides the latest and most cutting edge tools you will need to deploy the value approach successfully. It provides you with the tools to start thinking in a different fashion about the way in which you invest, introducing the ways of over-riding the emotional distractions that will bedevil the pursuit of a value approach and ultimately think and act differently from the herd.

Genres: Finance, Business, Economics, Nonfiction, Money, Unfinished, Personal Finance

416 pages, Hardcover

First published December 1, 2009

About the author

James Montier is an expert in behavioral finance, argues that investors would have a greater chance of spotting the formation of bubbles if they could only brush up on their history and have a greater awareness of human psychology. He has been a top-rated strategist in the annual Thomson Reuters Extel survey for the last five years. When not reading, writing, or speaking, Montier can usually be found swimming with sharks and blowing bubbles at fishes.

Reviews

[Matt Kelty · Rating 2 out of 5]

I'm a big fan of the author, but this is not a good book. If you are expecting "tools or techniques" as the subtitle promises, you will be disappointed.

Like too many other recent books by good financial minds, it's just a slapped together collection of their earlier writings/letters. Worse than that, most of his work is very high-level research on value vs. growth. If you're already a convert, there isn't a whole lot to be applied from these pages.

[Steve · Rating 2 out of 5]

A reasonable defense of value investing in general terms but disappointingly shallow, highly repetitive and weak on individual stock selection (perhaps because the author does not himself invest in individual stocks "given time constraints".) Unfortunately this book was not as interesting as his later book Bull's Eye Investing which provides a topical look at the current (high) level of the stock market and what strategies could work in the coming years - a more difficult topic in my opinion but better handled (closer to his expertise as an economic forecaster I suspect).

A great quote from the book comes from Third Avenue Management who said "DCF is like the Hubble telescope, if you move it an inch you end up studying a different galaxy". There were hundreds of similar quotes from Templeton to Buffet to Newton (who failed as an investor incidentally). While the quotes were interesting they were not well integrated into the text and came off as somewhat gratuitous.

Unfortunately, the supposed backbone of the book, "Value Investing: Tools and Techniques" is where the book really fails - it just isn't a blueprint for making successful value investments (in the way Graham's Intelligent Investor is).

That said, readers less familiar with value investing may appreciate the simplified approach and general advice.

My advice: rather purchase the equivalent works of Greenwald, Dremen, Klarman or Graham and if you are interested in Montier, read his other book "Bulls-eye Investing".

[Jonathan · Rating 3 out of 5]

It's always nice to read a contrarian view, especially when it comes to value investing. Montier dispels a lot of popular finance theory, things like CAPM, forecasting, and DCF models etc. And while I agree that many theories from the ivory towers do not translate to the real life experience of investors, I found Montier's writing a little annoying. Countless typos aside (no editor?), many of his examples were strange, and his self-deprecating attitude got old fast.

I wanted to like this more, but the prose read like a textbook in a total snooze fest.

I have a lot of respect for GMO (Montier's firm), but my biggest disappointment with Value Investing is what I find to be all-too-common among folks who say, "everything you know is wrong." They spend so much time disproving things, that they never get into the details of the solution - what actually works. Or, how they invest (hopefully successfully) on behalf of their clients. If anything, it makes you want to go passive.

[Luke Deacon · Rating 3 out of 5]

Fun with great points and interesting data analysis but fewer “tools and techniques” than the title would suggest.

Would love to see an updated version post-GFC now that growth has been outperforming value.

[InvestingByTheBooks.com · Rating 5 out of 5]

James Montier is a former sellside strategist, author of several books, currently working at GMO, a privately held investment management firm. He still writes insightful material under GMO Insights, together with other very readable persons like Edward Chancellor and Jeremy Grantham. The book comes with recommendations from people like Seth Klarman and Michael Mauboussin and the foreword is written by Bruce Greenwald. I don’t think many books have more high profile recommendations that this.

The book is a collection of short pieces written by Montier in between 2006 and 2009 organized in 6 parts with some added comments. Part 1 “why everything you learned in business school is wrong”, is something for every student and believer in the efficient market/CAPM to read. Personally, I am not a believer, so if you are like me, you could skip this. Part 2 is about behavioural investing, which I think is a good introduction if you haven’t read anything about it. However it’s a big topic, and I suggest you buy either his book The Little Book of Behavioral Investing: How not to be your own worst enemy or if you are very serious about learning this then buy A Practitioners Guide to Applying Behavioral Finance, which is a very well written full account of the subject. The best part of this book is his summary of what value investing is all about, which starts at Part 3, the philosophy of value investing. I recommend this to be read together with chapter 14, and part 6, real time value investing. Part 4 and 5 of the book are less interesting but have some interesting comments.

From my point of view the key negative with this book, is that it consists mostly of a collection of the regular research pieces Montier previously wrote when working at Societe General and Dresdner Kleinwort, of which I had read most before. This makes it a bit less fluent and fresh than it could have been. On the other hand, it’s very easy to just look at the content of the book and cherry pic whatever you find most interesting for the moment and find some really good reads. Some are short enough to read just before you go to sleep, or at the beach...

This is a book for someone who has been working in the financial markets for some time or at the minimum has been investing his or her money actively for a while. It is a very easy and pleasurable read. Since it’s written against a background of the events that have taken place over the last few years it’s easy to relate to, especially if you yourself have been investing and/or following the events from when the global financial crisis started. Do you recall that US house prices peaked in 2006, and using the Case-Shiller index the peak was at 206? Do you know where they are now? Answer at the bottom of the page.

Part 3, The philosophy of value investing and part 5, real time value investing, are among the best from a moneymaking perspective. Compared to a Graham/Greenwald or any other value book, this is a more practical approach. James Montier’s book not just takes into account what is value, but also the behavioural problems when valuations are low. I think it’s especially helpful to do it through the lens of the last big financial crisis.

“History doesn't repeat itself, but it does rhyme.” This is a quote often used when you are doing financial analysis and I expect that to be true many more times in the future as well.

[Joel · Rating 3 out of 5]

James Montier's book, Value Investing, provides a broad review of successful value-oriented investment methods plus a few common offsetting behavioral pitfalls. He argues that value investing is the only approach that puts risk management at the heart of portfolio construction. The book can be divided into two themes: assessing valuation and risk, and the importance of investor behavior in determining outcomes. On the latter, Montier has also written the well-regarded Little Book of Behavioral Investing.

According to Montier, the real aim of asset management was best expressed by Sir John Franklin Templeton: "to maximize real total returns after tax". Any activity that doesn't contribute to that goal is a distraction. A common distraction Montier strongly opposes is the capital asset pricing model (CAPM), which he calls "insidious". His philosophy is very practical and data-driven, and while CAPM provides enticing formulas that have theoretical appeal, the framework simply hasn't been predictive. Montier cites a study by Jeremy Grantham (a great investor and colleague of his at GMO) demonstrating that low beta stocks have outperformed high beta for decades, exactly counter to the premise of CAPM.

He goes on to say that "the entire risk management industry is an example of pseudoscience: people pretending to measure and quantify things that just can't be measured or quantified". Following this line of thought, he sees value-at-risk (VaR) systems as hopelessly flawed, despite their pervasive use. The only risk that matters is permanent capital impairment, a view he attributes to Benjamin Graham, who is considered by some to be the founder of value investing. Fundamental risks are best identified by understanding the three interrelated dangers of valuation risk, business/earnings risk, and balance sheet/financial risk.

Montier also has litte interest in common applications of discounted cash flow (DCF) models because they tend to instill falsely precise visions of the future. He cites the often inverse correlations between analyst forecasts and actual results, as evidence against this practice. Although, he does believe DCFs are useful in reverse engineering market-implied assumptions. Those figures can then be compared to base rates (historical experience) for similar businesses in similar industries. Further to this point, Montier is more focused on reversion to the mean as the backbone of valuation, rather than prescient insight.

The following passage summarizes Montier's behavioral advice and shows his sense of humor: "Neuroscientists have found that social pain is felt in exactly the same parts of the brain as real physical pain. Value investing often involves going against the crowd, and hence involves social pain. So value investors are the financial equivalent of masochists". In his view, a successful long-term value investor must by definition be eccentric, willing to be different from the crowd to achieve different results. Montier himself can be considered eccentric and is certainly principled, providing a great quote from Jean-Marie Eveillard: "I would rather lose half my clients than lose half my clients' money".

I think the book would benefit from additional editing to remove repetition and better organize the concepts, as the discussion wandered at times. He could also be clearer on what exactly investors should do, although what we should not do is well-explained. Taken as a whole, the content is very useful and standard reading for value-oriented investors, along with James Montier's many other rigorous and insightful writings.

Montier's Value-Investing Tenets:
Tenet I: Value, value, value
Tenet II: Be contrarian
Tenet III: Be patient
Tenet IV: Be unconstrained
Tenet V: Don’t forecast
Tenet VI: Cycles matter
Tenet VII: History matters
Tenet VIII: Be sceptical
Tenet IX: Be top-down and bottom-up
Tenet X: Treat your clients as you would treat yourself

[Ugh · Rating 2 out of 5]

Really bad. It appears to be a collection of articles from a website, and as such has little if any coherence overall and is very repetitive. All these articles are from around 2008 and they haven't been generalised, so the book feels very dated.
It also presents more academic research than a lay reader would care for, while failing to set out a practical plan for lay investors.
It's essentially a rallying cry for the cigar butt style of investing pushed by Ben Graham and largely abandoned by Warren Buffett. Whether Buffett moved away from that style because long-term compounders produce better results or because Berkshire grew too big to keep buying small cigar butts, I'm not sure - and nor, it seems, is this book.
There's little if anything here on how companies actually create value - it's all about mean reversion for temporarily undervalued companies.
Which is fine, as far as it goes, but even that isn't done well.

[Gleb Bazilevsky · Rating 4 out of 5]

This book (or rather, anthology of articles published by the author for the SG Group) was a helpful blend of concrete evidence and advice for value investing as well as a guide of behavioral finance. Montier lets his interests in value and investor behavior show as he progresses through the book in a well-structured way. However, the charts can be obtrusive and hard to follow, as they do not align with the text well and rarely have labeled axes.

[Anshul Karnwal · Rating 2 out of 5]

I don't think retail investors should need to know in such detail the academic debates around value investing, if you are already in the value camp . You can catch the important points from this book here and there in other investing book which will also be easy to understand and short.

[David · Rating 4 out of 5]

Very good overview of the benefits of value-investing..lots of research articles

[Patrick Mak · Rating 4 out of 5]

A well-researched book. It integrates behavioral psychological concepts into value investing. But some of the chapters of the book are repetitive, especially late in the book.

[Skywalker Hu · Rating 5 out of 5]

A bit too many data to prove his points. Nevertheless, a great book.
Notes on Substack.

[Mario Cerqueira]

good common sense but a lot of charts

[John Y · Rating 4 out of 5]

Overall good investment books, just sometime too dry and long

[Tyler · Rating 4 out of 5]

James Montier is a disciple of the great value investors: Dodd, Graham, Grantham, Klarman, Templeton, Browne, Buffet, Munger, etc. And behavioral economists: Thaler, Kahneman, Shiller, and Tversky. His book "Value Investing" is a digestible and intelligent look at how the principles first laid out in 1934 by Benjamin Graham in his book "Security Analysis" are as true now as ever. Montier also, like his current colleague at GMO, Jeremy Grantham, leans heavily on behavioral science and modern advancements in social psychology to make sense of the "madness of the crowds", and of market bubbles and anomalies.

One frustrating aspect of this book is that is a compilation of research reports Montier wrote across 2007-09 as a strategist at the French investment bank, Soc Gen; so, it lacks a coherent narrative thrust, and is at times maddeningly repetitive. Also, Montier has a middle school girl's infatuation for the exclamation point! Everything seems worth highlighting! It is exclamatory inflation at its most egregious! Minor frustrations, though, over what is an otherwise insightful and noteworthy book. A nit with the editor more than anybody.

Worth your time, is the way that Montier provides empirical, convincing, and simple evidence for why understanding value investing principles is important for any investor (as opposed to speculator) to understand. Montier, I think successfully, debunks a number of popular investment theories that drive so many investment decisions: CAPM pricing techniques and notions of "beta" and "alpha", market forecasting, growth stock investing, and other common practices of many (retail and institutional) investors. Montier also, like Thaler and others before him, points out how we are all victims of our own biases and of the decision traps our brain architecture always wants to throw us into. To fight these tendencies, a read of this book may help.

[Joel Gray · Rating 4 out of 5]

GIVEN OUR TENDENCY TO BE LOSS AVERSE, STRATEGIES THAT SOMETIMES SEE ST LOSSES WILL BE SHUNNED.

Value investors seem to do poorly relative to the m market for long periods of tie and make their strong relative performance in short periods (hard for most to tolerate this). It is easier to handle the reverse. ie long stretches of outperformance and shorter periods of under-performance = growth investors.

So loss aversion plays a pivotal role in dissuading people from becoming value investors.

For the typical investment fund average returns are 6% above returns that are weighted.

All too often too narrow a perspective is taken when thinking about diversification.

The only thing that goes up in a bear market is correlation.

Evidence shows that stocks which have a profit warning continue to do poorly for around a year. Buying a stock a year after a profit warning is generally a good idea. Generally investors do the opposite. Ore-commitments to sell after a profit warning and buy 1 year later might serve us well.

Pre-commitments are a self weapon in our arsenal against empathy gaps and the procrastination to which we all seem prone.

When profit warnings occur in our companies we find ourselves making excuses for the company.

Lock-ins make a great deal of behavioural senses as a method of avoiding empathy gaps.

Never under-estimate the value of doing nothing.

It takes an unusual manager to deliberately cultivate dissent. ITs more common for managers to think they know best and surround themselves with people who are happy to reinforce their viewpoint.

[Matthias Jørgensen · Rating 4 out of 5]

Montier writes well. I think this book is one you should go through quickly and use the summaries if you are already in the value investing camp, as much (even too much) of the book is just backing to claims you probably already believe.

The start, especially the Reverse Discounted-cashflow technique, was very interesting. This book is more, in my opinion, a review and test of classic value-investor claims. It contains a lot of interesting information, and gets you in the mindset of a real value investor.

9/10 if you are looking for statistics and facts about investing and markets.

8/10 in central tenets and tips for value investors. Most of these you will find better versions of in stuff like Howard Marks book 'The most important thing uncovered' (Get the illuminated version with comments, its worth it).

6.5/10 in, funny enough, Tools and Techniques for investing.

[Tyson Strauser · Rating 3 out of 5]

Montier's work uses empirical evidence to support value investing principles. He cites multiple authors of important investing literature, quotes from other successful investors, and evidence from historical market data to support his views. Widely regarded as a "perma-bear" by most market observers, Montier makes the case for being bullish last year despite widespread concerns of deflation driven by leverage and credit contraction. Well written-'s book reminds us all to remain objective and continue to revisit our assumptions.

[Jennifer · Rating 3 out of 5]

The first few essays are helpful. The latter ones are not as helpful because many concepts have been mentioned in the early chapters.

[Shauntelle James · Rating 4 out of 5]

This was an eye opener and an inciteful read. At times, readers can become mislead by the authors bullishness. However, the authors makes up for this with strong points of view. I was hoping the author would give some incite on the art history perspective but didn't. I learned for more from this book than I did from Corporate Finance. I hope I can use this knowledge in the real world.

[Rob Kol · Rating 5 out of 5]

Simply put, the best, most comprehensive book on value investing I've ever read. Every serious investor should have a copy in his or her library.