Of the thousands of investment letters penned in the industry, only one draws as much readership as Warren Buffet’s annual letter to his shareholders: The quarterly commentary written by Jeremy Grantham.
Grantham, the Chairman of the Boston-based investment firm Grantham Mayo Van Otterloo, was a featured speaker at Morningstar’s Investor Conference last week, and he spoke at two breakout sessions. Those who, like me, attended both were richly rewarded, as he gave two distinctly different talks, addressing many subjects not covered in his commentaries.
Grantham’s March quarterly commentary was titled “Reinvesting When Terrified,” which he says he wrote for himself – not for anyone else. Beginning in February, he sensed a déjà vu of 1974, when he felt he had lost the power to make changes. That bear market, like the most recent one, “hugely reinforced” the resolve of those who held cash as the market when down, and left those fully invested praying for a miracle.Â
He concluded there was only one answer: follow a simple battle plan (“plans that are too fancy mess you up”) where the key decision was how cheap the market would have to get for investors to “throw in all they have.” Otherwise, he said, if market opportunities evaporate, so does enthusiasm.
Grantham’s 2009 battle plan
But Grantham did not advocate “throwing in” everything at once, instead recommending a three-step plan, gradually increasing equity allocations to their normal levels as the market neared its target valuation.
In his standard asset allocation accounts, for 19 of the last 20 years he maintained a 50% allocation in global equity, to facilitate the marketing of his funds.Ă‚ By October of 2008, the market had declined to his first trip point, and he increased equity allocations by 7.5%.Ă‚ Later that year, when the S&P hit 740, it reached his second trip point, and Grantham increased equities by another 7.5%.Ă‚ The final move occurred very close to the market bottom, when the S&P reached 666.
Grantham almost over-weighted US and global equities, which he said were overpriced for most of last 20 years, and were close to becoming undervalued.
Grantham called this discipline “Plan A,” which he said was absolutely critical. “Most of us fail and are left behind. That’s what I was writing about – when you are left behind it causes panic.”
Those who fail at Plan A must follow Plan B: “You take a deep breath, recognize you lost round one, and plan to take a year to 15 months and average into the market,” he said. “Give the market plenty of time to have second thoughts. You may win a few months and lose a few months.”
Locking yourself in – staying in cash – and praying for a major setback is a mistake which Grantham called “regret minimizing.” On the other hand, if you barrel in, you are exposed to the market overcorrecting. “Either way you are screwed,” he said. “You have to balance those regrets. That is the real world.”
The market outlook
Grantham compared the current market to the 1970s when he made a lot of money, but warned that investors must recognize we are in a range-bound market.Ă‚
His team does a forecast every month, and project returns by asset class over a seven-year period.Ă‚ Just over 10 years ago, in September of 1998, they forecast real returns of -1.1% for the S&P 500 and 10.9% for the emerging markets.Ă‚ This 12-point gap translated to a 310-to-1 performance advantage by picking the right asset class.
Grantham faulted institutions that spend time chasing alpha through mutual fund or security selection, questioning how many correct choices they must make to improve performance. “Big asset classes drive success and are very inefficiently priced – amazingly inefficiently priced,” he said.
Current bearish sentiment is fueled by analysis which projects S&P valuations based on comparisons to historical markets. If the market follows the path of the Great Depression, the S&P will bottom at 300. The equivalent for the 1974 bear market is 450, and the 1982 market’s equivalent is 400.Â
“You can see why there are bears,” Grantham said, but added he has “parted with the bears.” He has more confidence in the resilience of economies than they do, based on the experiences of Germany and Japan after World War II. “We are not the delicate flower that the bankers tell us we are. We can handle a couple of Lehman-like bankruptcies,” he said.
“What separates me from the bulls are the seven lean years,” Grantham said, noting that his sentiment lies between the bulls and the bears.
He is markedly optimistic about the long-term prospects for the US economy. “Debt doesn’t matter – it’s just an accounting entry and not real life,” he said. “Unless you blow up factories, the economy will come roaring back.” He expects the developed economies to grow at 2.4%, but emerging markets to grow at 4%.Â
He warned of an emerging emerging market bubble, and cautioned investors that there is no connection between making money and top-line GDP growth. Leaders in those markets have objectives, such as protecting jobs, which may conflict with maximizing shareholder return. “You make money in companies through the filter of return on equity,” Grantham said, and not by betting on high growth economies.
“ China will achieve monster GDP growth, but there is no guarantee at all that it has anything to do with the returns you will make on Chinese stocks,” he said. The only correlation to high returns is investing at a low starting value.
Grantham hates gold as an asset class, and never invested in it until last fall, when he broke his vows and bought some because he thought a state of panic was about to unfold. “I was perfectly right, but I still lost money,” he admitted.
Read the complete article at www.advisorperspectives.com
Robert Huebscher
www.advisorperspectives.com
Grantham, the Chairman of the Boston-based investment firm Grantham Mayo Van Otterloo, was a featured speaker at Morningstar’s Investor Conference last week, and he spoke at two breakout sessions. Those who, like me, attended both were richly rewarded, as he gave two distinctly different talks, addressing many subjects not covered in his commentaries.
Grantham’s March quarterly commentary was titled “Reinvesting When Terrified,” which he says he wrote for himself – not for anyone else. Beginning in February, he sensed a déjà vu of 1974, when he felt he had lost the power to make changes. That bear market, like the most recent one, “hugely reinforced” the resolve of those who held cash as the market when down, and left those fully invested praying for a miracle.Â
He concluded there was only one answer: follow a simple battle plan (“plans that are too fancy mess you up”) where the key decision was how cheap the market would have to get for investors to “throw in all they have.” Otherwise, he said, if market opportunities evaporate, so does enthusiasm.
Grantham’s 2009 battle plan
But Grantham did not advocate “throwing in” everything at once, instead recommending a three-step plan, gradually increasing equity allocations to their normal levels as the market neared its target valuation.
In his standard asset allocation accounts, for 19 of the last 20 years he maintained a 50% allocation in global equity, to facilitate the marketing of his funds.Ă‚ By October of 2008, the market had declined to his first trip point, and he increased equity allocations by 7.5%.Ă‚ Later that year, when the S&P hit 740, it reached his second trip point, and Grantham increased equities by another 7.5%.Ă‚ The final move occurred very close to the market bottom, when the S&P reached 666.
Grantham almost over-weighted US and global equities, which he said were overpriced for most of last 20 years, and were close to becoming undervalued.
Grantham called this discipline “Plan A,” which he said was absolutely critical. “Most of us fail and are left behind. That’s what I was writing about – when you are left behind it causes panic.”
Those who fail at Plan A must follow Plan B: “You take a deep breath, recognize you lost round one, and plan to take a year to 15 months and average into the market,” he said. “Give the market plenty of time to have second thoughts. You may win a few months and lose a few months.”
Locking yourself in – staying in cash – and praying for a major setback is a mistake which Grantham called “regret minimizing.” On the other hand, if you barrel in, you are exposed to the market overcorrecting. “Either way you are screwed,” he said. “You have to balance those regrets. That is the real world.”
The market outlook
Grantham compared the current market to the 1970s when he made a lot of money, but warned that investors must recognize we are in a range-bound market.Ă‚
His team does a forecast every month, and project returns by asset class over a seven-year period.Ă‚ Just over 10 years ago, in September of 1998, they forecast real returns of -1.1% for the S&P 500 and 10.9% for the emerging markets.Ă‚ This 12-point gap translated to a 310-to-1 performance advantage by picking the right asset class.
Grantham faulted institutions that spend time chasing alpha through mutual fund or security selection, questioning how many correct choices they must make to improve performance. “Big asset classes drive success and are very inefficiently priced – amazingly inefficiently priced,” he said.
Current bearish sentiment is fueled by analysis which projects S&P valuations based on comparisons to historical markets. If the market follows the path of the Great Depression, the S&P will bottom at 300. The equivalent for the 1974 bear market is 450, and the 1982 market’s equivalent is 400.Â
“You can see why there are bears,” Grantham said, but added he has “parted with the bears.” He has more confidence in the resilience of economies than they do, based on the experiences of Germany and Japan after World War II. “We are not the delicate flower that the bankers tell us we are. We can handle a couple of Lehman-like bankruptcies,” he said.
“What separates me from the bulls are the seven lean years,” Grantham said, noting that his sentiment lies between the bulls and the bears.
He is markedly optimistic about the long-term prospects for the US economy. “Debt doesn’t matter – it’s just an accounting entry and not real life,” he said. “Unless you blow up factories, the economy will come roaring back.” He expects the developed economies to grow at 2.4%, but emerging markets to grow at 4%.Â
He warned of an emerging emerging market bubble, and cautioned investors that there is no connection between making money and top-line GDP growth. Leaders in those markets have objectives, such as protecting jobs, which may conflict with maximizing shareholder return. “You make money in companies through the filter of return on equity,” Grantham said, and not by betting on high growth economies.
“ China will achieve monster GDP growth, but there is no guarantee at all that it has anything to do with the returns you will make on Chinese stocks,” he said. The only correlation to high returns is investing at a low starting value.
Grantham hates gold as an asset class, and never invested in it until last fall, when he broke his vows and bought some because he thought a state of panic was about to unfold. “I was perfectly right, but I still lost money,” he admitted.
Read the complete article at www.advisorperspectives.com
Robert Huebscher
www.advisorperspectives.com
