The Chorus Is Singing -- Are You Listening?

One of the hardest things to do as an investor is ignore the great white cloud of noises that surrounds the market every day. In today's world of television,

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and all the other instant media sources, everyone has an opinion about everything. It's very easy to get sucked in, as expert after expert has an opinion on certain stocks as well as the market itself. If you traded all the expert opinions of just one days broadcasting on CNBC you would quickly become your brokers' best friend. Sorting the wheat from the chaff can be a daunting task, but there are some investors worth listening to and the easy way to identify them is their track record. When people giving an opinion have been super successful in the market for a long period of time, it makes sense to at least stop and consider their opinion. James Montier of GMO is the latest to add his voice to the chorus of very smart, very successful investors who are worried about the current market level. His biggest concern is that there is nothing cheap right now. He told a German publication this week, “When we look at the world today, what we see is a hideous opportunity set. And that's a reflection of the central bank policies around the world. They drive the returns on all assets down to zero, pushing everybody out on the risk curve. So today, nothing is cheap anymore in absolute terms.”

When asked about the current value of the market, Montier said, “Several valuation measures suggest that the S&P is overvalued by 50 to 70%. Every piece of valuation I do says this market is too expensive.” He went on to tell the interviewer from Finanz and Wirtschaft that, “Owning a large chunk of cash today hurts your performance. Following a value-based strategy requires you to be patient. We know that patience is a rare treat in human beings, and it is extraordinarily rate among investors. Patience hurts. But it is less foolish to do the right thing for the long term, than try to second guess what will happen in the short term” Montier has written several books on value investing and behavioral finance during his career. He is a member of GMO's Asset Allocation team. Prior to joining GMO in 2009, he was co-head of Global Strategy at Société Générale. While his credentials and resume are impressive, does that mean you should you listen to him? There are many a great resumes and bad advice in the history of Wall Street. The record shows that it is probably a good idea to pay attention when Montier expresses an opinion on the markets. In August of 2007 he wrote about his fear and greed index saying it's “a simple construct that measures the risk adjusted relative performance of global equities vs global bonds. Whilst it has fallen sharply, it remains a long way from the kinds of panic sentiment that usually characterize buying opportunities.” In Late November of 2008, Montier wrote that, “This is a value investor's version of heaven. From a bottom-up perspective, the equity market is offering some excellent companies at truly bargain prices for those with the fortitude to shut their eyes, or at least switch off their screens and buy.” Montier uses a very quantitative approach to value and has focused on what is cheap rather than what the market might do. He is bullish when there are lots of cheap stocks and bearish when there are not. He has a solid track record and his voice is just the latest to join the chorus of nothing cheap to be found. We have heard from very successful investors like Seth Klarmans, Carl Icahn, Sam Zell and Steven Romick of FPA Funds who have warned us that the market is too high given the level of economic activity and there are very few cheap assets to be found at these levels.

Curtis Jenson of Third Avenue recently joined the chorus as well when he noted in his fourth quarter letter that, “Investors proved willing to pay more for a given level of earnings or cash flow and the outperformance of smaller, lower quality issues – precisely the kind of investments that the Fund tries to avoid. The team's focus on quality and stringent valuation techniques undoubtedly held us back in the recent environment, but we believe the decision to stick to our discipline will be ultimately vindicated.” The common theme among these successful investors is that no one can predict the movements of the stock market and that they're not issuing a sell now and short the market call. It' more of a pay attention to what you are buying because this type of disconnect between market levels and real economic activity has historically ended badly. Their caution is based on the lack of opportunities that meet safe and cheap criteria. Investors can remain too confident for too long. Most will ignore the common sense warnings issued by some very experienced investors. As Seth Klarman pointed out, “Every Truman under Bernanke's dome knows the environment is phony. But the zeitgeist is so damn pleasant, the days so resplendent, the mood so euphoric, the returns so irresistible, that no one wants it to end, and no one wants to exit the dome until they're sure everyone else won't stay on forever.” The chorus is singing. Are you Listening?