James Montier recently wrote a great memo titled – Dare To Be Different, in which he discusses the idea of focusing on value stocks in emerging markets to generate outsized returns. Here’s an excerpt from the memo:
The conventional 60/40 portfolio of today is not going to generate the kind of returns that investors say they need. Investors must seek to embrace the terrifying concept of being different. As the ghosts of many great investors past have amply demonstrated, being different is the path to investment success. However, such advice falls into the simple but not easy category, to borrow Warren Buffett’s expression.
Both human nature and the institutional imperative are serious impediments to the budding contrarian. There are few quicker ways to lose one’s job than being alone and “wrong.” But the appalling forward-looking returns to a standard 60/40 portfolio leave no choice. Owning U.S. equities today virtually ensures low long-run returns. Instead, investors should own as much international and, in particular, emerging market equities as they can.
Emerging markets are trading on a Shiller P/E of 13x. This is the level of valuation that generally gets me excited. We have not experienced permanent impairment of capital from this level outside of markets that have shut down due to war. This doesn’t guarantee short-term returns or that we have reached a bottom: cheap stocks can always get cheaper. But it does provide a compellingly attractive entry point for those with a long horizon.
Even better are the value stocks within emerging markets, which trade on single-digit Shiller P/Es. So, embrace career risk, dare to be different, and recall the motto of the Special Air Service: Who Dares Wins.
You can read the entire paper here: James Montier – Dare To Be Different.
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