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Taking Stock

'The value of doing nothing' Add to ...

It's not often that a money manager responsible for billions of dollars draws inspiration from Winnie the Pooh. But there on page 165 of James Montier's latest book is a quote from the tubby bear himself: "Never underestimate the value of doing nothing."

That may seem like unusual advice, particularly at a time when the global economy is threatening to go for a double-dip and stock markets are tumbling on every disappointing headline. Indeed, before last week's rally, Canada's benchmark stock index came perilously close to an official 10-per-cent correction, a threshold U.S. indexes have already crossed.

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Isn't Mr. Montier selling stocks hand over fist? Loading up on T-bills? Fortifying his bunker with gold bars?

Hardly. The member of the asset allocation team at GMO LLC, a global investment firm with $107-billion (U.S.) under management, is taking his cue from Pooh.

"We're doing very little at the moment. We're sitting and waiting," the London-based Mr. Montier said while on a recent visit to GMO's Boston office. "Patience is a hugely underrated asset."

As a value investor and behavioural finance expert, Mr. Montier knows better than most that controlling one's emotions is the key to success in the stock market. The 38-year-old has penned four investing books - his latest is The Little Book of Behavioral Investing: How Not to Be Your Own Worst Enemy - and was a top-ranked strategist at Société Générale before jumping to GMO a year ago.

In his books and media interviews, he doesn't hide his contempt for economists ("the three blind mice have more credibility"), stock analysts ("their forecasting record is simply dreadful") and pundits such as CNBC's Jim Cramer ("really just a noise peddler"). With the media dramatizing every 1-per-cent swing in the S&P 500 as a momentous event, it's no wonder retail investors get worked up and do stupid things, such as buying at market tops and selling at market bottoms.

Which, of course, is precisely the opposite of what they should be doing.



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The time to buy is when people are fearful and stocks are cheap, but we're not there yet, he said. When that day arrives, he'll be in a position to pounce: GMO's global balanced account has a modest 56-per-cent equity weighting (below its 60-per-cent benchmark) and a hefty 22-per-cent cash position, giving him plenty of ammunition.

"At the moment we're just struggling to find anything that's particularly exciting," Mr. Montier said.

If listening to economists and analysts isn't the answer, how should retail investors navigate the stock market maze? Turning off the financial noise is a good first step. Creating a checklist of attributes to look for in a stock is also useful. As a value investor, one of his favourite measures is the 10-year price-to-earnings ratio, which smoothes out distortions created by the business cycle. He also scrutinizes the balance sheet to make sure the company isn't in danger of going bust, and analyzes how effectively management employs capital.

"There is no one right approach to investing," he writes. "The take-away here is that you should determine the factors you will use to assess your investment choices, and then you will focus on your own analysis of each of these elements."

It sounds fine in theory, but putting a plan into action when markets are collapsing and the talking heads are warning of another depression is another thing. To counter his fears, the late John Templeton used to keep a "wish list" of companies he admired but whose shares he considered overvalued. He would enter standing "buy" orders at below-market prices, so when the selloff came, he would automatically purchase the shares even if his instincts were telling him to run.

The important thing, Mr. Montier said, is to have a process and stick with it. Acting in the heat of the moment is seldom a good idea for investors. As Winnie the Pooh said, sometimes it's better to do nothing.

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