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Value Investing: Tools and Techniques for Intelligent Investment by James Montier

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Chapter 28. Financials: Opportunity or Value Trap?[28]

  • I have long argued that the long commodities/EM, short financials trade is the most overcrowded position in the market. I have no problem taking the opposite side of the popular long, and shorting the commodity and EM-related plays. However, the going long financials cause me more problems.

  • One group of value investors, typified by Richard Pzena, argues that financials are exceptionally cheap. He argues that the current situation will not materially impair the future earnings power of the financials. As such the current situation is 'A typical credit cycle that will work its way out as other post-excess crises have, and without impairing the long-term ROEs of the survivors.' This appeals to the contrarian within me.

  • However, on the other side, value investors like Steven Romick of FPA argue that 'Margins and returns on capital generated by financial institutions in the ...

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