The Flaws of Finance: James Montier at the CFA Institute
- Joshua M Brown
- May 13th, 2012
Robert Seawright at Above the Market published his notes from the James Montier presentation at the CFA Institute this week.
The presentation, titled "The Flaws of Finance." focuses on the trouble with assumptions and models and a regulatory framework that understands neither...
From Above the Market:
- If you give CAPM and VAR to monkeys, they’re going to create a financial crisis. Indeed, I think they just did.
- Remember that models are abstractions and don’t represent reality — they have clear weaknesses (low beta outperforms high beta).
- CAPM assumes risk is volatility and ignores liquidity and leverage (and that’s nuts).
- VAR — like a vest that is 95% bulletproof (fails when you need it).
- Bad models and bad assumptions tend to replace common sense.
- Graham — the more abstruse the maths, the more uncertain the results (“complexity to impress”).
Robert and I are both big fans of Montier's work and if you're serious about allocating capital, you probably are too.
I also liked Tom Brakke's distillation on the Montier Flaws theme, catch it here at Research Puzzle.
I found the video of the presentation but could not embed it so I linked to it below. Skip to the 16 minute mark for James Montier's introduction.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.