Tuesday, November 25, 2008 0 comments ++[ CLICK TO COMMENT ]++

Jeremy Grantham no superbear anymore

We should always pay attention when a superbear morphs into a creature with some features resembling a bull. We should doubly pay attention when he is one of few who has actually been correct with some of the key elements of the stock market crash.

I remember encountering Jeremy Grantham's writings and interviews a few years ago, and thought he was crazy. He was extremely bearish and it seemed hard to believe anything he said. I wasn't a bull (that's why I owned US Treasuries for a while--got out too early) and was familiar with the bearish views of Marc Faber and Stephen Roach (Morgan Stanley economist who was "demoted" and sent off to Asia for his bearish views it seems.) But Grantham was far more bearish and had arguments to back it up. He reminds of another person of similar calibre, albeit possibly an opponent of sorts (Grantham is "liberal"): Jim Grant*. Similar to how half of what Jim Grant says is extreme and hard to believe, Grantham was that sort of a person. At least in my eyes.

Well, Grantham has been proven right on most counts, including his view that the 2003 rally was the "biggest sucker rally in history".

For those not familiar, Jeremy Grantham, chairperson and co-founder of GMO funds, is considered to be a "value investor" but I believe that is somewhat misleading. In contrast to most value investors, he is primarily a macro investor and is influenced by asset allocation. In contrast, most value investors are stockpickers with a bottom-up focus.

Thanks to Paul Kedrosky's Infectious Greed for pointing out this video interview of Jeremy Grantham on the Conselo Mark show. The video kept pausing/caching every 30 seconds so it was annoying. It could be my home internet connection but anyway, it is worth checking out the video. If you are macro-inclined, like I am, it is quite useful; but if you are focused on individual securities, it may be a bit too big picturesque for you. The points he makes are identical to what he says in his 3Q2008 quarterly letter.

Here are some of the key points from his television interview and various articles:

  • Finally bullish on stocks: Says that the stock markets are attracive for those that can handle the risk of volatility. He seems to think tha the S&P 500 has hit fair valuation and is worth buying here. He says the risk is that the market overshoots and goes down further but one cannot be certain of that. He says value investors are paid to buy assets at low valuations and not to time things perfectly: "if stocks are attractive and you don’t buy and they run away, you don’t just look like an idiot, you are an idiot." :)
  • Considers Alan Greenspan and the FedRes to be his nemesis: Pins a lot of the blame for the mess on the Federal Reserve under Alan Greenspan. He is also not fan of Bernanke and points out the example of when Bernanke was saying that housing was not in a bubble and was supported by fundamentals, yet, if one looked at the super-long-term Shiller housing prices, you would see an unprecedented rise in prices in the last decade. To him, the housing bubble was obvious yet the FedRes couldn't see it. I am not as criticial of the FedRes as him (or others are.) It is difficult to identify bubbles in advance or in the middle of it. Housing may have been a bubble (I felt that way 2 or 3 years ago) but the global bubble that Grantham (and others like Mard Faber) identified were hard to determine. For instance, people like me always felt commodities were in a bubble but it was difficult to be cerain whether it was really a bubble except in hindsight. Right now, after the commodity price collapse, the bubble seems obvious and investors clearly don't want to attach a valuation on commodities or commodity businesses that they did less than an year ago.
  • Future expected returns looking good: He is expecting around 8% real return for US stocks, while he expects up to 13% for EM. He expects high quality US stocks to post around 12% real return. These are all above the long-term historical US return of around 6.5% real return (inflation is roughly 3% in the long run so add 3% to get nominal returns.) All these numbers are with value-added performance and one should subtract around 2% if they are a passive investor or have poor investing skills. He expects high quality US and emerging market stocks to outperform. My impression is that, by high quality, he is referring to stocks like Microsoft, 3M, and the like (he didn't suggest those names but that's the type of stocks he likes.) He implied that stocks in the US, emerging markets, and Japan are attractive.

My views are somewhat similar to his. I think valuations are attractive but not super-cheap. I don't know about his emerging market call (I'm still bearish) but do like his high quality US and EM call. Many of the large caps with solid franchises have gone nowhere for a decade even though they have continuously increased profits. This is strictly my view and has nothing to do with Grantham but I suspect technology may be one area that could see some good returns in the future. I'm not talking about the high flyers of the last 5 years like Google or RIMM but am thinking of companies like Microsoft, Cisco, and Dell. To see what I mean, these three trade with P/Es close to or below 10 (and only Dell is cyclical.) Sure, they are not the growth stocks of the 90's but they are still growing, generaly have close to zero debt, and have high ROE.

(* Interestingly, Jim Grant and Jeremy Grantham both consider the Federal Reserve, particularly when it was run by Alan Greenspan, as their nemesis. I suspect that Grantham, being somewhat of a liberal, is more sympathetic to the concept of the institution whereas Grant probably would be happy if it dissapeared. Grantham is also in favour of the large government intervention to stem the crisis and actually says that the Jim Grants of this world are wrong in their extreme free market views.)


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