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James Montier-No Silver Bullets
Old 12-25-2013, 02:15 PM   #1
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James Montier-No Silver Bullets

"From a very long-term perspective, inflation should be a wash for equities.
This is confirmed by Exhibit 22, the inspiration for which came from reading William Bernsteinís excellent Deep Risk. It shows the real return to various international equities against their long-term inflation rates. It is important to note that for equity holders there has never been a permanent impairment of capital caused by inflation. Even Germany, with its hyperinflationary episode, and Italy, with its chronic inflation, have managed to deliver positive real returns."-James Montier, GMO

To read the entire long article, go to http://www.gmo.com/America/MyHome/default

and choose Montier, Dec 2013 "No Silver Bullets"

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Old 12-25-2013, 02:22 PM   #2
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Inflation may be a wash, but the capital gains taxes on the resulting phantom gains are not.
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Old 12-25-2013, 02:42 PM   #3
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Originally Posted by GrayHare View Post
Inflation may be a wash, but the capital gains taxes on the resulting phantom gains are not.
Darn! Back to my spreadsheet.
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Old 12-25-2013, 03:34 PM   #4
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Inflation may be a wash, but the capital gains taxes on the resulting phantom gains are not.
True enough. Do you prefer losses?

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Old 12-26-2013, 02:00 AM   #5
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Seems like the author is saying while no one investment works all the time, paying attention to the price you pay does work. To me , the challenge is in identifying, and then acting, when various investments are cheap or dear. That is why so many of us tend to be buy and holders. If you don't sell, you don't pay those above mentioned cap gain taxes, nor do you run up transaction costs.
According to the authors company, GMO, very few assets are priced cheaply right now. I'd tend to agree.
So, as a recent retiree with a 25+ year time horizon, I'm keeping ample cash reserves, sacrificing current returns in return for less risk of ruin.
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Old 12-26-2013, 12:05 PM   #6
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I would like to think that equities have some built in inflation protection. So it's nice when some smart people say this.

Regarding GMO 7 year forecasting, what does this tell me about setting my current AA? My personal feeling is that long term forecasting does not help with the near term.

All GMO appears to be doing is suggesting a return to mean (in PE and profit margins). Sometimes that can take longer then 7 years, sometimes it can take forever. The only time I would take action is in extreme cases like the wild year 2000 market when growth was truly unreasonably priced. Of course, I say this in retrospect and did not see it quite that way at that time.
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Old 12-26-2013, 01:03 PM   #7
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Originally Posted by Lsbcal View Post
I would like to think that equities have some built in inflation protection. So it's nice when some smart people say this.

Regarding GMO 7 year forecasting, what does this tell me about setting my current AA? My personal feeling is that long term forecasting does not help with the near term.
If you find something that reliably helps with the near term, keep it quiet because you will become a billionaire, if you are not already one.

Ha
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Old 12-26-2013, 04:25 PM   #8
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Well, James Montier is a value investor with a bias towards stocks. The actual forecast for inflation over the next 15 years is 2.2% per year for his recomendations. In this scenario, stocks are an excellent play. Uses Benjamin Graham prominently in most of his writings. And he is presently advocating overallocation towards stocks in the present time.

While long term most of what he is writing is true - that even in Germany in total you have positive returns over the very long term, I don't think there were many who invested much in German stocks in the 1920's - 1945 that lived to talk about how smart of an investor they were by sticking with stocks. It is a truth that proves a point and bankrupts an investor all at the same time if what happened to Germany were to happen again to the stock market one was placing their funds.

As far as inflation goes, the most interesting of scenarios is starting to unfold with BDI Index doubling since August and well financed shipping stocks being great leaders in the stock market. NM up over 200% in 2013 and many shipping stocks up 20% today. These are the kind of moves in global markets that I have to believe effect goverment financing policies.
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Old 12-26-2013, 05:10 PM   #9
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If you find something that reliably helps with the near term, keep it quiet because you will become a billionaire, if you are not already one.

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Old 12-26-2013, 05:19 PM   #10
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...
As far as inflation goes, the most interesting of scenarios is starting to unfold with BDI Index doubling since August and well financed shipping stocks being great leaders in the stock market. NM up over 200% in 2013 and many shipping stocks up 20% today.
Glad to see that someone else also noticed that.

I should have bought more NM.
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Old 12-26-2013, 07:31 PM   #11
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Quote:
Originally Posted by Lsbcal View Post
I would like to think that equities have some built in inflation protection. So it's nice when some smart people say this.

Regarding GMO 7 year forecasting, what does this tell me about setting my current AA? My personal feeling is that long term forecasting does not help with the near term.

All GMO appears to be doing is suggesting a return to mean (in PE and profit margins). Sometimes that can take longer then 7 years, sometimes it can take forever. The only time I would take action is in extreme cases like the wild year 2000 market when growth was truly unreasonably priced. Of course, I say this in retrospect and did not see it quite that way at that time.
Rebalancing regularly kind of takes care of such a forecast. It may drop X% in seven years, but if it goes up and down in the meantime (and it probably will), you will have likely trimmed the outperformers and added to the underperformers along the way.

Also - I'm not sure about what kind of a mean they are returning to. Means evolve over time.
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