I’m not sure that a better approach to finding investment ideas isn’t spending my time combing the holdings of experienced, successful investors and picking out their best ideas.
I’m talking about looking at the portfolios of the investing greats and narrowing that down further to their highest conviction bets. I’m not suggesting just buying those stocks blindly, but taking those high conviction ideas and going with the ones that I agree are great opportunities.
Here are benefits of this approach:
- It saves a lot of hard work.
- It reduces risk as these ideas have made it through the screen of a legendary risk-averse investors.
- It would likely improve my returns.
So less risk, less work and better returns. It doesn’t seem like a difficult decision.
Yesterday I had a look at what Bruce Berkowitz believes is a portfolio that can go up four times over the next seven years. Today I’d like to focus in a little more on something that GMO’s Jeremy Grantham is pounding the table on.
What is Jeremy Grantham’s investment approach? Wikipedia actually defines it quite well as:
Grantham's investment philosophy can be summarized by his commonly used phrase "reversion to the mean." Essentially, he believes that all asset classes and markets will revert to mean historical levels from highs and lows. His firm seeks to understand historical changes in markets and predict results for seven years into the future. When there is deviation from historical means (averages), the firm may take an investment position based on a return to the mean. The firm allocates assets based on internal predictions of market direction
Grantham has spent his whole career studying asset bubbles and investing based on the premise that these bubbles always pop.
Isn’t it interesting then that Grantham is now most interested in investing in an asset class that certainly has all the hallmarks of being a bubble?
Below is an excerpt from a recent article that Grantham wrote:
My firm warned of vastly inflated Japanese equities in 1989 — the grandmother of all bubbles — US growth stocks in 2000 and everything risky in late 2007. The usual mix of investor wishful thinking and dangerous and cynical encouragement from industrial vested interests made these bubbles possible. Prices of global raw materials are now rising fast. This does not constitute a bubble, however, but is a genuine paradigm shift, perhaps the most important economic change since the Industrial Revolution. Simply, we are running out.
The price index of 33 important commodities declined by 70% over the 100 years up to 2002 — an enormous help to industrialized countries in getting rich. Only one commodity, oil, had been flat until 1972 and then, with the advent of the Organization of the Petroleum Exporting Countries, it began to rise. But since 2002, prices of almost all the other commodities, plus oil, tripled in six years; all without a world war and without much comment. Even if prices fell tomorrow by 20% they would still on average have doubled in 10 years, the equivalent of a 7% annual rise.
This price surge is a response to global population growth and the explosion of capital spending in China. Especially dangerous to social stability and human well-being are food prices and food costs. Growth in the productivity of grains has fallen to 1.2% a year, which is exactly equal to the global population growth rate. There is now no safety margin.
Then there is the impending shortage of two fertilizers: phosphorus (phosphate) and potassium (potash). These two elements cannot be made, cannot be substituted, are necessary to grow all life forms, and are mined and depleted. It’s a scary set of statements. Former Soviet states and Canada have more than 70% of the potash. Morocco has 85% of all high-grade phosphates. It is the most important quasi-monopoly in economic history.
What happens when these fertilizers run out is a question I can’t get satisfactorily answered and, believe me, I have tried. There seems to be only one conclusion: their use must be drastically reduced in the next 20–40 years or we will begin to starve.
Bruce Berkowitz has led me to own AIG (AIG) and Bank of America (BAC) because of his high conviction bets on the companies and his solid investment thesis. I think a nice addition to my “portfolio of best guru ideas” is an allocation of a good chunk of my capital to resource producers.
I’ve already got myself loaded up with oil producers, and now based on what Grantham is saying I should also have a focus on companies that can profit from high and rising phosphate and potash prices.
Before I go on a hunt to try and profit from rising phosphate and potash prices let me recap why Grantham thinks we have a serious supply crunch coming:
- Potassium and phosphorus cannot be made. They are basic elements.
- No substitutes will do. Both potassium and phosphorus are required for all living matter, animal and vegetable. Most notably, us. We humans are, for example, approximately 1% phosphorus by body weight.
- The resources are concentrated in a few known deposits
Time to go to work and dig up the best ways to take advantage of the direction that Grantham provides.