Wednesday, May 26, 2010

James Montier About To Kill "Cream Lickers" At Efficient Frontiers?

James Montier, the well known expert of behavioural finance and an advocate of value investing, the member of GMO's asset allocation team now, has an excellent "white paper" (available at GMO, registration necessary) "I Want to Break Free, or, Strategic Asset Allocation ≠ Static Asset Allocation".

This paragraph, written by James, may be applicable to the situation in the markets these days, if one believes that equities may lead over credit for a longer time:
Volatility creates opportunity, not risk. As John Maynard Keynes long ago opined, “It is largely the fluctuations which throw up the bargains and the uncertainty due to fluctuations which prevents other people from taking advantage of them.”
However, the flaws of modern portfolio theory are clearly exposed. It should not be difficult to identify the "cream lickers" at efficient frontiers, who fail to handle the reality... Click on chart to enlarge, courtesy of GMO.

Enjoy the note in full!

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