Posts Tagged ‘Gmo’
Montier: Was it all just a bad dream? Or, ten lessons not learnt
Friday, February 26th, 2010
James Montier, a member of GMO’s Asset Allocation Team, examines whether we learned anything from the market declines of 2008 and early 2009. In this paper - his first since joining GMO from Société Générale - he outlines ten of the lessons he believes not to have been learned.
Here is the opening paragraph:
“It appears as if the market declines of 2008 and early 2009 are being treated as nothing more than a bad dream, as if the investment industry has gone right back to business as usual. This extreme brevity of financial memory is breathtaking. Surely, we should attempt to look back and learn something from the mistakes that gave rise to the worst period in markets since the Great Depression. In an effort to engage in exactly this kind of learning experience, I have put together my list of the top ten lessons we seem to have failed to learn. So let’s dive in!”
And the ten lessons:
Lesson 1: Markets aren’t efficient.
Lesson 2: Relative performance is a dangerous game.
Lesson 3: The time is never different.
Lesson 4: Valuation matters.
Lesson 5: Wait for the fat pitch.
Lesson 6: Sentiment matters.
Lesson 7: Leverage can’t make a bad investment good, but it can make a good investment bad!
Lesson 8: Over-quantification hides real risk.
Lesson 9: Macro matters.
Lesson 10: Look for sources of cheap insurance.
Click here for the full report. (Click through from the link next to Montier’s picture. Please note that a short registration is required.)
Tags: Asset Allocation, Bad Dream, Brevity, Cheap Insurance, Dangerous Game, Gmo, Great Depression, Investment Industry, James Montier, Learning Experience, Lesson 1, Leverage, Memory, Paragraph, Pitch, Quantification, Relative Performance, Sentiment, Societe Generale, Valuation Matters
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Jeremy Grantham: Lessons Learned From the Past Decade
Tuesday, January 26th, 2010
Jeremy Grantham has become a familiar and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, the co-founder and chairman of Boston-based GMO has just published the Q4 edition of his quarterly newsletter entitled “What a decade!”.
Grantham’s letter begins with a short addendum (”Stop the Presses!”), which addresses two newsworthy items, namely “Volckerization” and the scrapping of the limit of the money corporations spend to influence political outcomes.
“What a Decade!” follows, providing Grantham’s thoughts on the past decade including the following list of lessons learned:
• The Fed wields even more financial influence than we thought.
• Low rates have a more powerful effect on driving financial assets than on driving the economy.
• The Fed is capable of being extremely out of touch with the real world - “What housing bubble?” - plus more doctrinaire - “No, the low rates had no effect on housing” - than anyone could have imagined.
• Congress is nearly dysfunctional, primarily controlled by large corporations, and hamstrung by the supermajority now routinely required in the Senate.
• Government administrations can be incompetent for long periods.
• Poor leadership can really damage a country’s hard-won reputation in a mere 10 years.
• Obama is not a miracle worker!
• The leadership of major corporations can be very lacking in insight and competence on a fairly routine basis.
• The two time-tested investment tools, value (P/E ratios and P/B ratios) and price momentum, are now much more heavily used and not so reliable as they once were, say from 1977 to 1997.
• Asset classes really are more inefficiently priced than individual stocks on average, and therefore offer greater opportunities for adding value and reducing risk.
• Developed countries, including the US, are past their prime compared with developing countries: it is indeed a new world order.
• Education and training are the keys to increasing wealth on a sustainable basis and the US is in danger of losing its once large edge here.
• We all live on an island, which can be overexploited and turned into a barren Easter Island if we are not careful. Resources are finite and biodiversity is fragile, and both must be protected. Carbon emissions are the single greatest threat.
• Being a global policeman is expensive, and somewhere between difficult and impossible.
• The Fed learns no lessons!
The Appendix to the report is a summary of Grantham’s part in a debate entitled “Financial Innovation Boosts Economic Growth”, sponsored by The Economist. The video of the debate follows below.
Click here for Grantham’s full report.
Source: Jeremy Grantham, GMO, January 2010.
Tags: Asset Classes, Co Founder, Competence, Developed Countries, Developing Countries, Financial Assets, Gmo, Housing Bubble, Investment Tools, Jeremy Grantham, Large Corporations, Long Periods, Miracle Worker, Political Outcomes, Poor Leadership, Price Momentum, Quarterly Newsletter, Ratios, Routine Basis, Supermajority
Posted in Markets | No Comments »
Jeremy Grantham: “Fair value on the S&P is 860″
Tuesday, October 27th, 2009
Jeremy Grantham has become a familiar and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, the co-founder and chief investment strategist of Boston-based GMO has just published the October edition of his quarterly newsletter entitled “Just desserts and markets being silly again”.
Before quoting from the report, Grantham recently put matters into perspective in a Kiplinger article, saying: “The recent rally has been very speculative, favoring risky assets over the past few months. I’m sorry if you missed investing at the market’s March lows, but don’t compound the damage to your portfolio by chasing gains in risky assets. We’re at the beginning of a seven-year period of lean returns. You should only be buying the highest-quality blue-chip companies, where valuations are most attractive.”
Here are a few excerpts from the Grantham’s newsletter.
“Corporate ex-financials profit margins remain above average and, if I am right about the coming seven lean years, we will soon enough look back nostalgically at such high profits. Price/earnings ratios, adjusted for even normal margins, are also significantly above fair value after the rally. Fair value on the S&P is now about 860 (fair value has declined steadily as the accounting smoke clears from the wreckage and there are still, perhaps, some smoldering embers). This places today’s market (October 19) at almost 25% overpriced, and on a seven-year horizon would move our normal forecast of 5.7% real down by more than 3% a year. Doesn’t it seem odd that we would be measurably overpriced once again, given that we face a seven-year future that almost everyone agrees will be tougher than normal?
“Price … does matter eventually, and what will stop this market (my blind guess is in the first few months of next year) is a combination of two factors. First, the disappointing economic and financial data that will begin to show the intractably long-term nature of some of our problems, particularly pressure on profit margins as the quick fix of short-term labor cuts fades away. Second, the slow gravitational pull of value as US stocks reach +30-35% overpricing in the face of an extended difficult environment.
“It is hard for me to see what will stop the charge to risk-taking this year. With the near universality of the feeling of being left behind in reinvesting, it is nerve-wracking for us prudent investors to contemplate the odds of the market rushing past my earlier prediction of 1,100. It can certainly happen. Conversely, I have some modest hopes for a collective sensible resistance to the current Fed plot to have us all borrow and speculate again. I would still guess (a well-informed guess, I hope) that before next year is out, the market will drop painfully from current levels. ‘Painfully’ is arbitrarily deemed by me to start at -15%. My guess, though, is that the US market will drop below fair value, which is a 22% decline (from the S&P 500 level of 1,098 on October 19).
“Unlike the really tough bears, though, I see no need for a new low. I think the history books will be happy enough with the 666 of last February.”
Click here for the full report on Grantham’s reasoning for his cautious stance.
Source: Jeremy Grantham, GMO, October 2009.
Tags: Chief Investment Strategist, Co Founder, Desserts, Excerpts, Gmo, Guess, Horizon, Jeremy Grantham, Lean Years, Lows, October 19, Panies, Price Earnings Ratios, Profit Margins, Quarterly Newsletter, Rally, Risky Assets, S Market, Valuations, Wreckage
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Jeremy Grantham: Prepare for Low Growth, Higher Energy Prices
Monday, July 27th, 2009
Jeremy Grantham has released his latest newsletter, “Boring, Fair Price.” Grantham’s newsletter is a must read, given that he has made some of the most noteworthy and canny calls of the last decade. Grantham called the tech bust, accurately predicted 10 years out, the S&P 500 would revert to a fair value of 950 last fall, give or take a few days, and exited emerging markets last summer. In early March, his letter, presciently titled “Reinvesting when Terrified,” was released the day the market turned around.
Here, Grantham writes how he has bitten hard on the energy transition apple, a theme we have covered a great deal throughout the year, and goes to some, but not too much length to explain that higher energy prices loom, and what their impact will be on agriculture and transportation, and how oil will eventually flow (only) to its first and best uses. This one will be near and dear to Canadian investors.
Click the button in the top right corner to full screen the viewer, and use the menu on the left hand topside to print. Or, you may download it here.
Tags: 10 Years, Agriculture, Amp, Apple, Bust, Canada, Canadian Investors, Click The Button, Emerging Markets, Energy Prices, Energy Transition, Few Days, Gmo, Higher Energy, Jeremy Grantham, Last Decade, Left Hand, Low Energy, Newsletter, oil, Q2, Top Right Corner
Posted in Emerging Markets, Markets | No Comments »
Jeremy Grantham’s Morningstar Interview (5/28/09)
Sunday, June 7th, 2009
Jeremy Grantham, Chief Investment Officer, and founder of $150-billion Boston-based asset manager, GMO gives Morningstar an eloquent and quietly gripping interview. As usual, the super-modest, irrepressibly shy, Grantham, struggles to look up at Morningstar’s Pat Dorsey, and for that matter the camera. What comes through instead is the soft-spoken, and truly understated genius, known for his prescient calls on the market.
These are not to be missed.
Below are the videos of Jeremy Grantham as he was interviewed by Morningstar:
Part 1:
What to do if you missed the rally, and its durability.
http://www.morningstar.com/cover/videocenter.aspx?id=295077
Part II. Quality stocks will trump junk.
http://www.morningstar.com/cover/videocenter.aspx?id=295076
Part III: Seven lean years will follow…
http://www.morningstar.com/cover/videocenter.aspx?id=295072
Part IV: Growth stocks simply do not beat value stocks;
Fast growing countries do not necessarily outperform slow growing countries;
Top line growth almost does not matter.
Value matters in everything.
http://www.morningstar.com/cover/videocenter.aspx?id=295075
Part V. Grantham’s greatest concern is for inflation
http://www.morningstar.com/cover/videocenter.aspx?id=295073
Tags: Asset Manager, Boston, Cambria, Chief Investment Officer, Countries, Durability, Font Definitions, Font Format, Genius, Gmo, Growth Stocks, inflation, Jeremy Grantham, Lean Years, Morningstar, Mso, Orphan, Panose, Pat Dorsey, Pitch, Props, Quality Stocks, Rally, Serif, Style Definitions, Style Type, Text Decoration, Theme Font, Times New Roman, Value Matters, Value Stocks, Videos
Posted in Markets | No Comments »
Why Jeremy Grantham Changed His Mind
Thursday, May 28th, 2009
The opinions of Jeremy Grantham, veteran investor and founder of Boston-based money-management firm GMO, have been featured regularly in posts on the Investment Postcards blog. Against the background of his general disregard for conventional wisdom, his turnaround in early March from a perma-bearish stance to a more bullish demeanour was particularly closely followed.
“… be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle less black than the day before,” he said in March in a newsletter entitled “Reinvesting when terrified“. He also cautioned investors not to fall prey to “terminal paralysis” that often sets in after a financial crisis.
A recent interview by SmartMoney with Grantham provides insight on why he has changed his mind and his prognosis for the future. A few excerpts from the interview are shared below.
SmartMoney: In 2007 you were worried the global financial market could fall apart, and you said a market downturn was probably coming. Okay, say it: “I told you so.”
Jeremy Grantham: That seems so long ago. I felt like saying that a few months ago, but now onward and upward, and wait for the next unexpected twist.
SM: Why were you so certain things were going to get so ugly?
G: There wasn’t a whole lot of doubt where I was coming from. I thought the fair value of the S&P was 925; the S&P went to 1500. And by 2006 the housing bubble was at a 100-year peak. This was the 32nd asset bubble that we’ve tracked, and all but the U.K. housing bubble have popped.
SM: … for the first time in years, you like US stocks.
JG: We think a fair price for the S&P 500 index is 900. By sheer divine intervention we bought into the market on Mar. 6, the day it hit the recent low of 666. It’s likely, but far from certain, that we’ll go back and make a new low. You aren’t going to get to buy at the absolute low unless you have a time machine.
SM: Anything else besides US stocks?
JG: US stocks were nicely cheap, and frankly, the rest of the world was even cheaper. In early March, when we bought, we invested only in stocks we thought would have a 10 to 14 percent average annual return after inflation. That’s magnificent. We haven’t seen anything like that in 20 years. It was somewhat disappointing that prices moved up so fast in just a couple of weeks. The odds are a bit more than 50-50 that we will go back and test that low.
SM: So you’ve made a quick buck. Now what?
JG: You have a set of possibilities. First, if the market nosedives, it’s easy: You buy. The second is confusing, when the market just goes sideways, between 700 and 800. The market is irritatingly cheap then, but not super cheap. The longer that goes on, the less probability we will set a new low, so we’ll ultimately put money each month into the market.
SM: What if stocks keep rallying?
JG: If the market goes higher, above 950, and then starts moving sideways, between 950 and 1050, we probably do very little. Then the market is moderately overpriced.
SM: Over the long haul, is there any particular industry or sector you like?
JG: The people who move quickly in this market can make money. The people who invest in energy alternatives will make more. Alternative energies and combating climate change are the single most important economic initiatives over the next 10 years-really over the next 50 years. It will be a very exciting next 50 years.
SM: Will we get out of this mess?
JG: The stimulus is so great in the United States, China and the United Kingdom, it will kick the economy up. GDP will go back positive for two to three quarters. They’ll assume everything is settled, that throwing money at it has worked. But the long-term imbalance between overproducers [like China] and overspenders [like the US] will continue. It’ll be a multiyear drag on growth.
SM: We’re just throwing money at the problems?
JG: If the problem is that we consume too much and borrow too much, does it make sense to borrow more and spend more? It doesn’t make sense to solve alcoholism by giving an alcoholic a quart of whiskey, but everyone believes that we must stimulate. So that’s why we feel this is a temporary cure. This is like when you revive the drunk, he staggers down a few blocks, then falls down again.
SM: That does not sound promising.
JG: We’re not rich, and we’re undersaved and underpensioned. Those will be a real brake on economic growth. This will be a pretty long recovery period, longer than we’re used to, but hopefully not as long as Japan took. It will not be as long as the Depression, but it will be several years, and not just two. Lord knows we have had several fat years.
Source: Russell Pearlman and Jonathan Dahl, SmartMoney, May 21, 2009.
Tags: Conventional Wisdom, Demeanour, Disregard, Divine Intervention, Excerpts, Financial Crisis, Global Financial Market, Gmo, Housing Bubble, Jeremy Grantham, Light At The End Of The Tunnel, Market Downturn, Money Management Firm, Paralysis, Prey, Prognosis, Smartmoney, Time Machine, Turnaround, Unexpected Twist, Whole Lot
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Jeremy Grantham: The last hurrah and seven lean years
Thursday, May 7th, 2009
Jeremy Grantham’s keenly awaited quarterly newsletter, entitled “The last hurrah and seven lean years”, has just been published. Grantham, who co-founded Boston-based GMO in 1977, covers a lot of thought-provoking ground in this letter, but focuses mostly on where to invest now.
The widely-respected Grantham’s newsletter is must-read material. The first few paragraphs are published below and a link to the full article is provided at the bottom of the post.
“First, let me lament the loss of near certainties in investing. The financial and economic collapse that I described as ‘the most widely predicted surprise in the history of finance’ about 18 months ago is behind us. More precisely, we believed that bubbles had formed in global profit margins, risk premiums, and U.S. and U.K. housing prices, and that all three were ‘near certainties’ to break, with severe consequences for the economic and financial system. All have thoroughly burst and are in their over correction phase with the single exception of U.K. house prices, which I’m confident will do their duty. Normally there are, of course, no near certainties in investing.
“Life is not meant to be that easy. Asset allocators have been blessed in the last 10 years with a large collection of extraordinary outliers. As my favorite quote by Mandelbrot (1983) says, ‘Even though economics is a very old subject, it has not truly come to grips with the main difficulty, which is the inordinate practical importance of a few extreme events.’ If this last 10 years did not prove him right, nothing will.
“Since 1988, we have been offered 8 or 10 2-sigma events. (A 2-sigma event is our definition of an important bubble or bust.) All of these events were bubbles, and all behaved themselves by bursting. Now, sadly, there are probably none.
“Government bonds are the one serious candidate. In our opinion, they are badly overpriced but probably not by enough to justify the bubble title. Global equity markets are still cheap, but in major markets are nowhere near 2-sigma, 40-year bust levels. Some smallscale 2-sigma bargains may exist in the fi xed income markets in rate differentials, but need skillful analysis and knowledge to disentangle from value traps. And, they are a very far cry from, say, the opportunities offered by buying credit default swaps at a handful of basis points on overleveraged financials in early 2007. So, all in all, welcome back to the age of guesswork.”
Click here for the full report.
Source: Jeremy Grantham, GMO, May 2009.
Tags: Asset Allocators, Bubb, Bubbles, Certainties, Correction Phase, Economic Collapse, Extreme Events, Favorite Quote, Gmo, Government Bonds, House Prices, Jeremy Grantham, Lament, Lean Years, Mandelbrot, Outliers, Paragraphs, Profit Margins, Quarterly Newsletter, Risk Premiums
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Jeremy Grantham: Beware of terminal paralysis
Thursday, February 26th, 2009
As the stock market indices are flirting with key charting levels and we are waiting for Mr Market to show his hand, it is useful to get an update on the outlook from Jeremy Grantham.
Grantham, chairman of Boston-based GMO, was a great skeptic between 1999 and October last year when he started propagating “hesitant and careful buying”. His latest thinking has just been reported in an interview with CNN Money as quoted below.
“Meanwhile, GMO chairman Jeremy Grantham is more upbeat - though he does expect more pain to precede any recovery.
“Looking back at historic bear markets, Grantham draws comparisons to 1974 and 1982, when the S&P 500 lost roughly half its value. Since he estimates the current S&P 500 fair value at 900, Grantham puts his worst-case bottom at a hair-raising 450.
“‘That’s fairly scary, but on the one hand we look at the massive stimulus, and then on the other we try to work out the fact that the global economy is in worse shape than it was in ‘74 or ‘82,’ says Grantham. ‘I’d say there are three-to-one odds that we go to a material new low. We should count on [the S&P 500] hitting 600 for a little while, and we should hope like mad it doesn’t get deep into the 500s.’
“Patience rules. Another looming threat is that the market may enter an extended period of drops and rebounds that flatten long-term returns and strand buy-and-hold investors for decades.
“Japan’s stalled stock market is one recent example, but the U.S. has had its shares of quagmires, too. Grantham likes to point out that investors who bought at market crests in 1929 and 1965 had to wait 19 years each time just to break even.
“Still, Grantham says buy-and-hold still makes sense for long-term investors when stocks are trading below fair value. He especially favors U.S. blue chips, and his fund is on a strict, slow schedule to invest as valuations dip even lower.
“‘If you don’t have a schedule for investing, you will not do it,” he says. “When the market goes down, it reinforces the hoarding of cash. By the bottom, you suffer what we called in 1974 terminal paralysis - you cannot pull the trigger. Almost everyone who avoids the great pain is very slow to get back.’
Source: Eugenia Levenson, CNN Money, February 25, 2009 (hat tip: Investorazzi).
Tags: 19 Years, Bear Markets, Blue Chips, Cnn, Cnn Money, Crests, Global Economy, Gmo, Jeremy Grantham, Paralysis, Patience, Quagmires, Rebounds, Skeptic, Stimulus, Stock Market Indices, Term Investors, Valuations, Worst Case
Posted in Economy, Markets, Outlook | No Comments »
Jeremy Grantham: Riveting Interview with Steve Forbes
Thursday, January 29th, 2009
Whoa! Jeremy Grantham gives a riveting, in-depth, specific and eloquent must-see interview. It is a clear and enlightening discussion with one of the finest and quiet geniuses in the investment world.
Subsequent to publication of Jeremy Grantham’s quarterly newsletter a few days ago, Steve Forbes conducted this interview with the chairman of Boston-based GMO. The video clip and transcript are published below.
Click here or on the image to view the video.
Click here for the transcript of the interview.
Here are the topical headings from the interview:
- Steve: China’s Long Tale
- Grantham’s Big Call
- A Whole New Bubble
- Time To Buy
- Cheapest in 20 Years
- Japan A Blue Chip?
- Emerging Markets
- Buy Big US Stocks
- Stimulus!
- Our Leaders Failed
- Dysfunctional Markets
- China Bubble
Here are a few paragraphs:
Steve Forbes: Well thank you, Jeremy, for joining us today. First, since you have bragging rights in this situation, what made you a bear, [a] great skeptic? Between 1999 until about a couple of months ago, you were saying, “Stay out.”
Jeremy Grantham: Well, really very simple. Not rocket science. We take a long-term view, which makes life, in our opinion, much easier.
Steve Forbes: Well everyone says it, but you certainly practiced it.
Jeremy Grantham: We actually do it. Well, we tried the short-term stuff and it was so hard; we thought we’d better do the long-term. We just assume that at the end, in those days, of 10 years, profit margins will be normal and price-earnings ratios will be normal. And that will create a normal, fair price. And more recently, we’ve moved to seven years, because we’ve found in our research that financial series tend to mean revert a little bit faster than 10 years–actually about six-and-a-half years. So we rounded to seven.
And that’s how we do it. And it just happened from October ‘98 to October of ‘08, the 10-year forecast was right. Because for one second in its flight path, the U.S. market and other markets flashed through normal price. Normal price is about 950 on the S&P; it’s a little bit below that today.
And on my birthday, October the 6th, the U.S. market, 10 years and four trading days later, hit exactly our 10-year forecast of October ‘98, which is worth talking about if only to enjoy spectacular luck. The P/E was a little bit lower than average and the profit margins were a little bit higher, so they beautifully offset. And given our methodology, that would mean that on October the 6th, the market should have been fairly priced on our current approach. And indeed it was–that was even more remarkable–950, plus or minus a couple of percent.
Steve Forbes: And what did you see during that 10-year period that made you feel–other than your own models–that this was something highly abnormal, that this couldn’t last?
Jeremy Grantham: Well, first of all, the magnitude of the overrun in 2000 was legendary. As historians, you know we’ve massaged the past until it begs for mercy. And we saw that it was 21 times earnings in 1929, 21 times earnings in 1965 and 35 times current earnings in 2000. And 35 is bigger than 21 by enough that you’d expect everyone would see it. Indeed, it looks like a Himalayan peak coming out of the plain.
And it begs the question, “Why didn’t everybody see it?” And I think the answer to that is, “Everybody did see it.” But agency risk or career risk is so profound, that even if you think the market is gloriously overpriced, you still have to get up and dance. Because if you sit down too quickly–
Steve Forbes: Famous words of Mr. Prince.
Click here for the transcript of the interview.
Source: Forbes, January 23, 2009.
Download the Forbes: Jeremy Grantham Briefing Book here.
Tags: Blue Chip, Boston, Bragging Rights, China, Dysfunctional, Emerging Markets, Few Days, Flight Path, Geniuses, Gmo, Half Years, Interview Source, Investment World, Japan, Jeremy Grantham, Paragraphs, Price Earnings Ratios, Profit Margins, Quarterly Newsletter, Rivetting, Rocket Science, S Market, Seven Years, Skeptic, Steve Forbes, Steven Forbes, Stimulus, Stocks, Topical Headings, Video Clip
Posted in Emerging Markets, Markets | No Comments »
