Jeremy Grantham: A Lucky Chance Does Not Make a Strategy

The biggest profits sometimes come out of nowhere, but you shouldn't let it change how you invest

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Dec 14, 2020
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Jeremy Grantham (Trades, Portfolio)'s early investment in battery producer QuantumScape (QS, Financial) recently earned him a handsome profit when it was taken public by a special purpose acquisition company. His initial $12.5 million investment in the company was made seven years ago, but after the public offering at the end of November and the subsequent stock rally of another 53%, the holding is worth roughly $278 million as of Dec. 14. In other words, this particular SPAC deal gave the investor a return in excess of 2,000%.


One trap that investors fall into all too often is thinking that because an investment paid off due to unexpected or risky conditions, future investments of the same type will surely net similar profits. For example, the QuantumScape example may make it seem like investing in SPACs would be a good thing to implement into your investment strategy in order to achieve high returns.

However, as Grantham noted following the success of QuantumScape's SPAC deal, a lucky chance is not grounds for changing one's investment strategy. The fact that this one SPAC profited his firm unexpectedly has done nothing to change his strategy or improve his opinion of this highly speculative and risky financial instrument.

About Grantham

For background, Grantham is a co-founder and a member of the Asset Allocation team of Grantham, Mayo, Van Otterloo (GMO) & Co. LLC. The Boston-based asset management firm utilizes various long-term, value-based investment strategies that focus on risk management and diversification.

Grantham is known for his success in consistently identifying and avoiding stock market bubbles, including the Japanese market bubble in the late 1980s, tech and internet stocks in the late 1990s and credit markets in 2006.

It should be noted that the QuantumScape investment was made by Grantham as part of his personal portfolo, and not as part of his firm's portfolio.

An accidental benefit

Grantham invested in the QuantumScape as part of a series of early green-tech producers. The San Jose, California-based company manufactures solid state lithium-ion batteries for use in electric cars. Although Grantham naturally made the investment with the expectation that it would eventually return a profit, he did not anticipate that Kensington Capital Partners, a SPAC, would announce plans to merge with the battery producer and take it public.

When the merger announcement was made in September, it valued QuantumScape at $3.3 billion, and shares of the SPAC rose to around four times their listing price by the time the acquisition was completed on Nov. 30.

The QuantumScape position is "by accident the single biggest investment I have ever made," Grantham told the Financial Times in a recent interview. He still considers the SPAC structure to be a "reprehensible instrument, and very, very speculative by definition."

In fact, not only does Grantham consider SPACs to be too speculative to incorporate into his investment strategy, he also sees them as a sign of poor market health, pointing out that "Wall Street's obsession with the vehicles could be a sign of unsustainable market optimism."

This is because, as opposed to more direct-to-market initial public offerings, SPACs involve a third party that is basically an empty shell primarily concerned with its own profit. Since more investors are willing to take the risk of establishing a SPAC when opportunities are scarce in the markets, the recent uptick in popularity of the highly speculative vehicles indicates a concerning lack of profitable opportunities elsewhere.

The ins and outs of SPACs

For those who are not familiar with how SPACs work, things typically go like this: the founders of the group raise funds on the open market to bankroll an as-yet-unspecified acquisition. If enough investors sign on for the deal, the SPAC goes public in an IPO that is typically priced at around $10 per unit (each unit normally consists of one stock plus one warrant that is exercisable at $11.50). The SPAC puts the money in a trust account and lets it accumulate interest until the founders manage to secure an acquisition deal.

Next, the founders present the idea to their shareholders, who can then vote whether they want to approve the deal or redeem their stock to get their $10 per unit back, plus any interest accumulated. If enough shareholders vote for the deal, then the acquisition goes through and the SPAC becomes a normal publicly traded company under the acquisition's name. If it fails, then all of the shareholders get their money back.

At first glance, this seems like a deal that couldn't possibly be any sweeter, with high upside potential for investors and limited downside potential. However, there is quite literally no way to research which SPACs have a high chance of long-term success because the terms of the deal are not reached until after the company is formed – if a deal is reached at all. Moreover, if a SPAC fails, it is the founders of the investment vehicle that are on the hook, so the structure heavily incentivizes making a deal at any cost, thus inviting massive overvaluation and ample opportunity for profit-taking.

Don't be fooled by an outlier

In his famous book "The Intelligent Investor," which is considered one of the founding works of value investing, Benjamin Graham gave the following example showcasing the mechanisms and implications of meeting with success in a highly speculative investment:

"I would like you to imagine a national coin-flipping contest. Let's assume we get 225 million Americans up tomorrow morning and we ask them all to wager a dollar. They go out in the morning at sunrise, and they all call the flip of a coin. If they call correctly, they win a dollar from those who called wrong. Each day the losers drop out, and on the subsequent day the stakes build as all previous winnings are put on the line. After ten flips on ten mornings, there will be approximately 220,000 people in the United States who have correctly called ten flips in a row. They each will have won a little over $1,000.

Now this group will probably start getting a little puffed up about this, human nature being what it is. They may try to be modest, but at cocktail parties they will occasionally admit to attractive members of the opposite sex what their technique is, and what marvelous insights they bring to the field of flipping."

This example is meant to serve as a warning to investors about speculation. An investor who wins the coin-flipping contest once would not be wise to replace their previous investment strategy with coin-flipping. In the same way, just because Grantham's firm has profited off of a SPAC deal this once (and quite by accident at that) does not mean the investing guru is tempted to accept SPACs as a viable part of his firm's investing strategy.


Following Jeremy Grantham's profit off of QuantumScape's SPAC deal, quite a few headlines were floating around mocking the investor for making a "profit on a SPAC deal after previously criticizing blank-check companies," the reasoning being that an investment that turned such an eye-watering profit must surely change the misguided view that the investment type should be avoided.

However, as Grantham aptly pointed out, a lucky chance should not be mistaken for something that would be good to incorporate into your regular investing strategy. Just because it works one time does not mean it will work again, especially if the odds are not in your favor (or if you do not even know what the odds are).

Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.

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