Montier's Nine Rules

I really can't get enough of James Montier.

In a recent article Montier laid out his nine rules for value investing. Montier is specifically addressing investing in securities in this article, but I think these rules could just as easily be applied to investing incommercial real estate.

1. Value, value, value

The price I pay for an investment determines its likely return. No asset is so good as to be immune from the possibility of overvaluation, and few assets are so bad as to be exempt from the possibility of undervaluation.

Investments should be purchased with a margin of safety. Any estimate of intrinsic value will only prove to be correct via the intervention of luck, so buying only when a large discount to that estimate is available offers protection against being wrong.

2. Be contrarian

As Sir John Templeton observed: "It is impossible to produce superior performance unless you do something different from the majority." Following a value-oriented approach will almost certainly lead you to a contrarian stance because you are generally buying the unloved assets and selling the market's darlings.

3. Be patient

As Ben Graham wrote: "Undervaluations caused by neglect or prejudice may persist for an inconveniently long time and the same applies to inflated prices caused by over-enthusiasm or artificial stimulants."

Cheap stocks can always get cheaper and expensive stocks can get more expensive, so patience is required.

4. Be unconstrained

Many professional managers are forced to be specialist, but they should have the freedom to invest where they think the opportunities lie. There may be times, such as last year, when my analysis tells me the best place to be is net short. Early last year, my screens were throwing up the highest number of short ideas I have ever seen.

5. Don't forecast

The folly of forecasting is one of my pet hobby-horses. I can't understand why so many investors spend so much time engaged in an activity that has so little value, and so little chance of success.

6. Cycles matter

As Howard Marks of Oaktree Capital puts it, we may not be able to predict, but we can prepare. All sorts of cycles exist – economic, credit and sentiment to name but three.

7. History matters

Sir John Templeton also observed that: "This time is different" were the four most dangerous words in investing.

8. Be sceptical

Bruce Springsteen once remarked that: "Blind faith in anything will get you killed." I share this view on the dangers of the lack of critical thinking.

9. Be top-down and bottom-up

While stock selection is best approached from the bottom up, ignoring the top-down can be extraordinarily expensive. The last year has been a perfect example of why understanding the top-down can benefit and inform the bottom-up.