Brian Milner had an interesting article on the front of the ROB Saturday, “Warning to equity investors: 'Watch your tail.”
Noting the stock market's recent shift back to bullish sentiment over the past couple of months, Milner interviewed famed value investor Jeremy Grantham of GMO of Boston. Grantham has made a name for himself over the years by correctly calling over-zealous markets and taking a defensive stance to protect assets under management from bear market declines. Grantham has explained that he learned the need for a defensive, tactical approach early in his career when full of confidence and efficient market theory, and fresh out of Harvard Business School in 1968, Grantham played the Go-Go market at its peak and lost all his money by 1970.
Harsh lessons in investing are very valuable when they are taken to heart and they are particularly valuable when learned early on in one's career while there is still time to change one's ways. Grantham did. By the late 90's GMO had some 40 billion in assets under management, when they noted that equity valuations were beyond all reasonable prospects for lasting reward. Grantham and company moved a large weight of their equities to cash. Within months they were seeing large numbers of redemptions as impatient investors fled their fund in pursuit of the hottest high tech flyers. Grantham stood his ground even as risk-obsessed clients fled and assets under management shrank by half. And in the end of course, Grantham and company were right. In the end the crash of 2000-2002 proved Grantham was right, and he and the clients who had stuck with him were protected and ideally positioned then to step in and buy after others had been devastated. Investors ultimately recognized GMO for its strength and wisdom. Today the firm manages assets of more than $145 billion.
I noted over the past couple of years that Grantham had been writing and speaking again about building asset bubbles all around the world. I had not heard him interviewed in the past many months now until Milner's article Saturday. His comments on recent market strength are candid as always:
“I think the equity investors are likely to be very wrong. We've had the initial shock to animal spirits and the initial shock to the housing market. But most of these things take a long time to work through the system. The contraction of liquidity might take years, in fact. It might very well be the end of an era. I suspect it is.”
Stock chasers argue that this is the ideal time to hunt for bargains among the battered blue chips. Mr. Grantham, whose investing technique involves asset allocation rather than individual stock selection in any case, couldn't disagree more.
“Stock pickers always say that,” he says. “If the market's dangerous and overpriced and vulnerable, and in denial like this, it isn't about stock picking. In an ordinary year – and there are many of them; they just haven't been around recently – it's all about industry- and stock picking. But not now. Now it's about the big picture, which is: Watch your tail.”
For the many investors enamoured of commodities, Mr. Grantham also suggests caution. Although he agrees that the long-term trend is up, “they've gone too far too fast, and you can get hurt pretty badly” by a sharp correction stemming from temporary excesses in a slowing global economy.
The toughest thing to do is to stay out of the market, load up on cash “and fret about all the money you're not making. But that's probably the best advice. Let the other suckers take all the risk.”
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