Thanks to reader Will for sending me a link to this rare Jeremy Grantham interview clip from November 21, 20008. I have long respected Grantham for his realist views and tactical advice to real life investors. He was one of the few who called the tech bubble in the late '90's and warned investors of the irrational risk to capital invested. As far back as 2005 he was also one of a seemingly small group of us warning about world wide bubbles and the threat that was mounting to the global economy and investors.
I agree with what Grantham says in this interview. He still believes that there is a 2 to 1 probability that stock markets will be lower next year before they bottom this cycle. He acknowledges that they could go a lot lower before this de-levering phase is complete. On the other hand, there is a smaller probability that markets could rally from present levels. Market sentiment is a wild and wooly beast. We have to be develop our plan for a range of possible outcomes.
With world markets falling more than 45% over the past year, there is admittedly a greater chance now of reward to equity investors over the next several years than there has been for more than 10 years. But let us not forget that present valuations are relatively attractive when compared to the period of irrational, crazy equity valuations since the later part of the 90’s. As Gratham says, this is no assurance that asset prices cannot get a lot cheaper still. All 27 asset bubbles in the past few hundred years have all reverted below their mean eventually. So what is a prudent investor to do?
Grantham suggests one might toe back slowly into US equities and some emerging markets, which he sees as relatively inexpensive. But he thinks 20% invested is a reasonable commitment at this point. He also asks that people consider how they are likely to react if markets do drop a further 20 or 30% from here. If one is likely to take this badly, (as most would) Gratham suggests maintaining a large cash position over the coming months.
I like his comments about balancing the dual regrets. On the one hand if people do buy now and stay invested through a further 20 to 30% declines, they will suffer great regret and are likely to panic at some point in the experience. On the other hand, if markets do accomplish the unlikely, and rally strongly in the coming weeks, there will be other regret for buys not made. In my experience, for most people, the regret of missing out on gains is bothersome, but not nearly as bad as the regret of large capital loss. Balancing the threat of the dual regrets is the art of money management.
Cory’s Chart Corner
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