Jeremy Grantham: Reinvesting When Terrifi ed

Discussion in 'Educational Resources' started by aresky, Mar 30, 2009.

  1. aresky


    March 2009

    Every decline will enhance the beauty of cash until, as some of us
    experienced in 1974, ‘terminal paralysis’ sets in. Those
    who were over invested will be catatonic and just sit and
    pray. Those few who look brilliant, oozing cash, will not
    want to easily give up their brilliance. So almost everyone
    is watching and waiting with their inertia beginning to set
    like concrete. Typically, those with a lot of cash will miss
    a very large chunk of the market recovery.
    There is only one cure for terminal paralysis: you
    absolutely must have a battle plan for reinvestment and
    stick to it. Since every action must overcome paralysis,
    what I recommend is a few large steps, not many small
    ones. A single giant step at the low would be nice, but
    without holding a signed contract with the devil, several
    big moves would be safer. This is what we have been
    doing at GMO. We made one very large reinvestment
    move in October, taking us to about half way between
    neutral and minimum equities, and we have a schedule
    for further moves contingent on future market declines. It
    is particularly important to have a clear defi nition of what
    it will take for you to be fully invested. Without a similar
    program, be prepared for your committee’s enthusiasm
    to invest (and your own for that matter) to fall with
    the market. You must get them to agree now – quickly
    before rigor mortis sets in – for we are entering that zone
    as I write. Remember that you will never catch the low.
    Sensible value-based investors will always sell too early
    in bubbles and buy too early in busts. But in return, you
    may make some important extra money on the roundtrip
    as well as lowering the average risk exposure.

    For the record, we now believe the S&P is worth 900 at
    fair value . Global equities
    are even cheaper. (Our estimates of current value are
    based on the assumption of normal P/Es being applied to
    normal profi t margins.) Our 7-year estimated returns for
    the various equity categories are in the +10 to +13% range
    after infl ation based on an assumption of a 7-year move
    from today’s environment back to normal conditions.

  2. aresky


    2007 great prediction

    Jeremy Grantham: All the World's a Bubble
    04/27/07 - 10:07 AM EDT

    Grantham, chairman of Boston firm Grantham Mayo Van Otterloo, he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.

    Everything is in bubble territory, he says.

    Everything. 'The bursting of [this] bubble will be across all countries and all assets.'

    -- Jeremy Grantham

    And it becomes self-sustaining. "The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you."
    It's something to think about the next time you hear someone tell you that the stock market will keep rising simply because the world economy is doing so well. That would make sense only if we were paying a constant price for each unit of world GDP, instead of higher and higher prices for one slice of that GDP -- equity.

    "The bursting of [this] bubble will be across all countries and all assets, with the probable exception of high-grade bonds," Grantham warned.
    "Since no similar global event has occurred before, the stresses to the system are likely to be unexpected. All of this is likely to depress confidence and lower economic activity."

    Grantham sees two big potential catalysts that might turn this bull market into a bear: a surge in inflation, leading to higher interest rates, and a squeeze on profit margins, which are currently running way above long-term averages.

    As for timing, he concedes that's impossible to predict. But here's the kicker: Even Grantham thinks you probably need to be bullish right now. The reason? Most bubbles, he notes, go through a short but dramatic "exponential phase" just before they burst. Like Japan in 1989 or the Internet in early 2000.

    "My colleagues," wrote Grantham, "suggest that this global bubble has not yet had this phase and perhaps they are right. ... In which case, pessimists or conservatives will take considerably more pain."

    04/27/07 - 10:07 AM EDT