THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Saunday, May 19, 1996 TAG: 9605180404
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Long : 143 lines
The small bust of William Shakespeare seems out of place next to dozens of books about interest rates, gold prices and securities analysis.
But Paul M. Montgomery says he has it on his office wall for a reason.
``There's nothing that psychologists know today that wasn't better said by Shakespeare,'' the Newport News money manager and financial analyst said.
For anyone trying to understand financial markets, an appreciation of the emotions in Shakespeare's plays is crucial, Montgomery said; just as crucial as understanding interest rates, corporate earnings and cash flow.
Montgomery's application of literature to the financial markets is no surprise to the 30 pension funds, investment advisors, banks and brokerage firms that buy his research.
Montgomery has attracted a loyal following by using an array of unconventional indicators to forecast changes in the stock and bond markets: weather patterns, long-term economic cycles and evidence of investor sentiment on magazine covers and in comic strips.
In the lengthy essays that he prepares for clients every few months, Montgomery refers to philosophy, history, literature and science. But combing these fields isn't an academic exercise.
``My job is not to educate people,'' the 53-year-old said. ``My job is to make money for my clients.''
``I'm not interested in what's already been addressed,'' he said. ``I like dealing with problems that haven't been solved.''
After shopping for market information about four years ago, Weaver C. Barksdale began buying Montgomery's research.
``Over the years, we saw the data coming out of the Washington statistics mills becoming poorer and poorer in quality,'' said Barksdale, whose Nashville investment advisory firm Weaver C. Barksdale & Associates manages $2.5 billion. ``We decided we needed some additional market analysis.''
Stephen S. Smith, executive vice president of Brandywine Asset Management, said Montgomery's forecasts have helped his firm make several timely purchases of bonds.
Smith, who has a hand in managing the $5.5 billion of assets at Wilmington, Del.-based Brandywine, said he didn't know much about the indicators Montgomery puts into his forecasts.
``All I know is that over a 16-year period, he has called major turns in the (bond) market,'' he said.
In the Dayton, Ohio, office of Merrill Lynch, Pierce, Fenner & Smith, broker Don Schade credited Montgomery's research with providing his clients with a valuable edge.
``I see a ton of research,'' said Schade, whose clients include insurance companies and corporate pension funds. ``Merrill Lynch and other firms do an excellent job on the fundamentals of the market, but Paul brings a different perspective.''
Unlike many financial analysts, Montgomery rejects the assumption that investors act rationally. In fact, the emotions are still prevalent that fostered rampant speculation in tulip-bulb prices in 17th century Holland and stock in London's South Sea Company before it collapsed in 1720.
``The fear and greed and human excesses are identical,'' he said.
Montgomery's search for directions in the financial markets begins every weekday morning when he and an assistant gather more than a thousand indicators. They include various interest rates, measures of stock and bond activity, and mutual fund prices. By giving different weights to these indicators he determines when conditions in the stock and bond markets are likely to change and the significance for investors.
Schade recalled Montgomery's forecast of a sustained rise in bond yields beginning Oct. 15, 1993.
``The bond market had a heck of a run and (the yield on) long-term Treasuries had gotten down to 5 3/4 percent,'' he said. ``A year later, they were up to 8 3/4 percent. He called that one dead-on.''
Being able to anticipate even a modest change in the direction of interest rates is especially valuable to insurance companies and other large investors that regularly buy and sell bonds.
After studying psychology at Davidson College and the College of William and Mary, Montgomery considered pursuing a teaching career. But the energy of the financial world was more appealing than academia.
In finance, ``there is an instant discovery of whether you are right or wrong,'' he said, referring to the daily closing prices of the stock and bond markets.
Montgomery earned a master's degree in business administration from the University of Virginia's Darden School in 1970 and worked briefly with a large brokerage firm on Wall Street before returning to Newport News. He joined the local office of Legg Mason Wood Walker Inc., a Baltimore-based firm, where he still works.
The lean, affable Montgomery works from a tiny office with two computers and a desk covered with paperwork and tables of financial indicators. With his tie loosened and his sport coat hanging from the back of his chair, Montgomery described some of the influences on his career.
The important ones were his parents and grandparents. ``They were very tolerant of unusual behavior,'' said Montgomery, whose father had been a labor forecaster and gathered information for bids at Newport News Shipbuilding.
``They said that if you worked hard and were excruciatingly honest, it doesn't matter what people thought of your opinions.''
For someone doing research on the financial markets, working in Newport News has its drawbacks. One is the scarcity of people with which to exchange ideas. But being away from the financial markets in New York insulates him from distractions.
``Because of the type of research I'm doing, it's probably better that I don't have anybody to talk to,'' Montgomery said. ``It's probably harder to come up with original ideas if you're sitting at a trading desk'' on Wall Street.
Montgomery's work received national exposure in early April when the weekly financial newspaper Barron's carried a lengthy interview with him. But as valuable as Montgomery's forecasts have been to his clients, the thinking behind his research runs counter to the way most analysts and money managers think.
``A lot of people would consider it voodoo investing,'' said Smith of Brandywine Asset Management, who has been using Montgomery's research since 1982. ``It doesn't fit into nice, neat compartments.''
Montgomery hasn't always been right. Last May, one of his forecasts called for a brief change in the direction of bond prices. Instead, the change continued through May and into June, said Barksdale of Barksdale & Associates.
``If you're right 55 to 60 percent of the time, you're doing well,'' Barksdale said. ``He's right much more often than that.''
Added an investment manager with a New England investment concern that uses Montgomery's research: ``What I like about Paul is his modesty. When he's wrong, he quickly admits it, and when he's right, he's humble.''
Beginning in the early 1970s, Montgomery concentrated on gold stocks, whose prices later soared in the midst of inflation. By 1981, his focus had shifted to the bond market.
``My work indicated that there would be the first great bull market in a generation,'' he said. ``I saw something coming that we hadn't seen in a long time.''
Because bond prices had been falling for decades and very few analysts were doing research on bonds, Montgomery saw an opportunity to make a name for himself.
But 15 years later, he is increasingly wary of the stock and bond markets and has shifted more of his attention to commodities and gold stocks.
Montgomery has a few goals unrelated to the financial markets. One is to write about the moral aspects of a blood-soaked Shakespearean play, Titus Andronicus. Another is to write about cancer.
``In many cases,'' he said, ``the thinking in medicine is almost as sloppy as it is in economics.'' ILLUSTRATION: Color photo
Pual M. Montgomery
KEYWORDS: ECONOMIST by CNB