I have been a fan of GMO’s James Montier (and his colleague Jeremy Grantham) for some years and rarely miss an opportunity to read what they have to say.

Montier’s latest paper, written with colleague Matt Kadnar, is entitled “The S&P 500: Just Say No”.

It’s a long read so pour yourself a cup of coffee, click on the link above and settle in to digest it.

Spoiler Alert:

Here are just a few quotes that I found interesting…

The thesis they are testing

“Shouldn’t we ..throw in the towel, index all of our equity exposure to the S&P 500, and call it a day?”

On using a Shiller P/E to evaluate how expensive the US market is

“This is the third most expensive market in history. The only times we have seen more expensive US equity markets were 1929 and 1999. Strangely enough, we do not hear many exhortations to buy US equities because it is just like 1929 or 1999.”

Quoting Benjamin Graham

“True bargains have repeatedly become scarce in bull markets…Perhaps one could even have determined whether the market level was getting too high or too low by counting the number of issues selling below working capital value. When such opportunities have virtually disappeared, past experience indicates that investors should have taken themselves out of the stock market and plunged up to their necks in US Treasury bills.”

On being labeled a Permabear

“Please do not mistake us for members of that species known as permabears. We don’t always hate US equities as a matter of principle. We are just governed by the precepts of valuation.”

The crux of their argument

“Going passive is an active decision. Human nature is to extrapolate the recent past. It is easy to see, given the strong performance of US equities in both absolute and relative terms, why many are suggesting they are the only asset you need to own. And the cheapest way of owning them is passively. However, the decision to be passive is still an active decision – and we would suggest one with important risks that investors are not paying adequate attention to today. As more and more investors turn to passively-managed mandates, the opportunity set for active management increases.  A decision to allocate to a passive S&P 500 index is to say that you are ignoring what we believe is the most important determinant of long-term returns: valuation.”

The (relative) good news

“There are still some relative opportunities around. In absolute terms, EAFE [Europe,  Australasia  and the Far East] is ugly, but just not as ugly as the US. In relative terms EAFE stocks look much cheaper than US equities. The story is similar within emerging market equities, but the news is actually better. Emerging equities have a forecast of 2.9% real (local terms) and cheap currencies to boot. There are numerous reasons to be worried about emerging. But again, the key question is “What’s in the price?” And to us, emerging market equities look poised to significantly outperform developed market equities.  And if you look at the emerging value universe, the forecast looks even better, rising to 6.2% real [in dollar terms].


  • Long-term investors should ignore valuations at their peril. The surest way to incur a permanent capital loss is to overpay for an asset.
  • Taking an overall view of a market / index / sector etc… is interesting only insofar as it can generate ideas and throw up exceptions.
  • Passive investments which do not have a low valuation bias should be treated with caution
  • Professional managers like GMO invest globally and spread their risks when they are not compelled to buy particular assets and don’t.
  • Global managers like GMO who are looking for value across the world have turned their eyes towards Emerging Markets (like South Africa) and so domestic investors should not be surprised to see foreigners supporting local prices.
  • It’s always great to have managers who take a long-term view.

Disclaimer: The information provided is not intended to address the circumstances of any particular individual or entity and should not be considered to be advice in any way. No person should act upon this information without first obtaining professional advice.

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