Jeremy Grantham: 3 Insights From a Top-Down Value Investor – The Motley Fool 06-02-15

Salient to Investors:

Jordan Wathen at TMFValueMagnet writes:

  • Eyquem found that from 1951 to 2013, the lowest PE decile of stocks compounded annual returns of 16.7% versus 9.3% for the highest decile.
  • Never pile in or out of an investment for the simple fear of falling behind.
  • No one gets fired for being average.
  • Individual investors’ single biggest advantage is not having to report to anyone, not having to match the market’s return every year.

Jeremy Grantham says:

  • Financial assets can be overpriced or underpriced but will always return to average.
  • Rewards come from buying cheap assets not from taking risks.
  • Professional investors’ behavior is driven by career risk. Keynes said their primary directive is first and last to keep their jobs and so never, ever be wrong on their own. The great majority therefore go with the flow, either completely or partially, thus creating the momentum that drives prices far above or far below fair price.

Read the full article at http://www.fool.com/investing/general/2015/06/02/jeremy-grantham-3-insights-from-top-down-value-i.aspx

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GRANTHAM: Here Are 5 Lessons I Learned From 2 Failed Investments – Business Insider 07-20-14

Salient to Investors:

Jeremy Grantham at GMO advises:

  • You don’t know how the important people in your life will behave under pressure.
  • Local cultural differences can be very lasting.
  • Even great ideas can fail.
  • Investing is serious and should not be driven by excitement, as it is for many individual investors.
  • From 1970 to 1990, institutional investors seemed to prefer start-ups to the giant banks, which did so badly in the 1974 decline.
  • It is better to be lucky than good.

Read the full article at http://www.businessinsider.com/grantham-5-important-lessons-2014-7

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MARKET GURU: The Conditions Are Set For A ‘Veritable Explosion’ In M&A That Sends Stocks To ‘True Bubble Levels’ – Business Insider 07-18-14

Salient to Investors:

Jeremy Grantham said:

  • The stock market is expensive and headed for a bubble at S&P 500 above 2250, and offers paltry returns for years to come.
  • Expect an explosion of M&As to record numbers due to cheaper debt in this cycle, profit margins that will remain high, a still young economic recovery due to labor market slack and room for capital spending.
  • Investors only now regaining their courage, while low interest rates are forcing companies to find new ways to grow.

Read the full article at http://www.businessinsider.com/grantham-ma-to-fuel-stock-market-bubble-2014-7

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Tom DeMark Says U.S. Stocks at Risk of 11% Decline – Bloomberg 05-02-14

Salient to Investors:

Tom DeMark at DeMark Analytics said the DJIA will start declining if we get one daily close above 16,581, accompanied by an intraday high exceeding 16,661. DeMark said markets top on good news, not bad news, when you have exhausted the last vestige of buying.

Sam Stovall at S&P Capital IQ said the S&P 500 has risen for nearly 31 months without a decline of 10 percent or more, versus the average of 18 months since 1945.

Jeremy Grantham at Grantham Mayo Van Otterloo said the S&P 500 is 65 percent overvalued but will climb above 2,250 before collapsing after the next US presidential election.

The median economist expects the unemployment rate to fall to 6.6 percent this month.

Read the full article at http://www.bloomberg.com/news/2014-05-02/tom-demark-says-u-s-stocks-at-risk-of-11-decline.html

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Jeremy Grantham: The Fed is killing the recovery – CNNMoney 03-24-14

Salient to Investors:

Jeremy Grantham at GMO said:

  • The slow recovery is due to the Fed’s actions. In the 1980s the US had an aggregate debt level of 1.3 times GDP versus 3.3 times debt now and yet GDP has been slowed – showing that more debt or QE does not create growth.
  • After WW I the economy came roaring back without intervention or bailouts. After the S&L crisis, we liquidated the bad banks and their bad real estate bets and the economy came roaring back. We did not liquidate the people who made the bad bets this time.
  • The Bernanke put – the belief that if anything goes bad the Fed will come to the rescue – has had a profound impact on people and how they act.
  • Without Fed intervention the crash may have been worse and the downturn sharper but by now the depths of that recession would have been forgotten and the US would have regained its growth.
  • Savers have become collateral damage of Bernanke’s policies. Lower interest rates have not spurred capital spending and there is no evidence that QE has boosted capital spending. Historically we have always come roaring back from recessions, even the Depression but we have never had such a limited recovery as this.
  • The Fed can manipulate stock prices, perhaps the only thing they can do, but why would we want to get an advantage from the wealth effect when we are going to have to give it all back when the Fed reverses course.
  • The Fed encourages steady increasing leverage and more asset bubbles with very cheap leverage on the upside, and bailouts on the downside. Only hedge fund managers have benefited from QE.
  • The market will go higher because the Fed won’t stop playing until we are in bubble territory and it bursts – usually at 2 standard deviations from the market’s mean, or 2,350 on the S&P 500.
  • Not investing in stocks because his 7-year prediction calls for negative market returns and won’t invest on the basis of speculation driven by the Fed’s misguided policies.
  • The next bust will be unparalleled because all the central banks have leveraged, which has never happened before. Assets are overpriced generally and will become cheap again. 

Read the full article at http://finance.fortune.cnn.com/2014/03/24/jeremy-grantham-federal-reserve/

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This Market Is Going Higher, Warns Jeremy Grantham – BloombergBusinessweek 11-20-13

Salient to Investors:

Jeremy Grantham at GMO said:

  • The US market, especially riskier shares, could rise another 20 percent to 30 percent in the next year or two, along with the rest of the world, including emerging-markets, followed by a serious market bust.
  • The S&P 500 is 40 percent overvalued. The expected real rate of return for the next 7 years is a negative 1.3 percent per annum.
  • Prudent investors almost invariably must forego plenty of fun at the top end of markets.

Ben Inker at GMO said there is no evidence whatsoever of a golden age of corporate investment and economic growth that would solve the federal deficit and unemployment and other problems.

Read the full article at http://www.businessweek.com/articles/2013-11-20/this-market-is-going-higher-warns-jeremy-grantham

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Jeremy Grantham’s Bullish Two-Year Outlook – Barron’s 11-19-13

Salient to Investors:

Jeremy Grantham at BMO writes:

The Greenspan-Bernanke policy of excessive stimulus, now administered by Yellen, will continue, and that the path of least resistance, for the market is up.

It would take a severe economic shock to outweigh the effect of the Fed’s relentless pumping of the market as seen by its continued advance despite almost universal disappointment in economic growth.

US stocks, especially the non-blue chips, will rise 20% to 30% in the next 2 years, with the rest of the world including emerging market equities outperforming in at least a partial catch-up. Then we will see the third market bust since 1999.

US stocks are badly overpriced with the prospect of negative real returns over 7 years. The sharp and unexpected uptick in parts of the US IPO market indicates we are in the slow build-up to a badly overpriced market and bubble conditions.

Most foreign markets are overpriced but less so.

There are few signs of a traditional bubble in equities – US individuals are not yet consistent buyers of mutual funds. There are no wonderful and influential theories as to why the P/E structure should be much higher today as there were in Japan in 1989 or Greenspan’s theory of the internet driving away the dark clouds of ignorance and ushering in an era of permanently higher P/Es in 2000, though today’s unprecedented margins, usually the most dependably mean reverting of all financial series, are apparently now normal.

Prudent investors almost invariably must forego the fun at the top end of markets so should now be reducing their equity bets and their risk level in general.

Yellen also thought the housing bubble merely reflected a strong economy and has happily gone along with the failed Fed policy of hoping for a different outcome despite repeating exactly the same thing. The consequences threaten to be just as bad again within 2 or 3 years. Greenspan had had no serious job prior to becoming Fed chairman, and a proven record of almost laughable failure as an economic prognosticator to the stock market in the 1970s.

The crash of 2008 is overwhelmingly seen as a financial event, but commodity price rises and the only US-wide housing bubble in history are understated in their contribution. The general bias in our economic thinking exaggerates the significance of the financial, paper world at the expense of the more mundane, but more important, real world.

We had the largest ever price rise in oil and other commodities, despite the absence of inflation in wages and consumer prices, hurting demand. Oil prices rose due to the rapidly rising long-term cost of finding and delivering oil and short-term shortages. The housing bubble was GMO’s warning signal.

We are almost back to normal in home ownership, perhaps within a year of full readjustment of the excesses.

The wealth effect from housing is greater than from the stock market and more dangerous, because home ownership involves over 30% more of the general public and those additionally impacted had typically far less liquidity to deal with a crisis than did stockholders.

Economic growth is slowing down globally, most obviously in Europe, and has a 25% chance of overwhelm even the Fed in the next 2 years. The general lack of global fiscal stimulus and almost precipitous decline in the US Federal deficit do not help.

Economist Kenneth Boulding believed economics had lost its way in a maze of econometric formulas, which placed elegance over accuracy.

The theory of rational expectations does not fit the real world and resulted in 5-7 decades of economic mainstream work being largely thrown away.

Efficient Market Hypothesis is the most laughable of all assumption-based theories, which tells us that investment bubbles have not occurred and could never occur, despite at least 4 of the great investment bubbles in all of investment history in the last 25 years – Japanese stocks in 1989, the Japanese land bubble in 1991, US stocks in 2000, and the first truly global bubble in 2007 in global stocks, fine arts and collectibles, and almost all of the real-estate markets. Brainwashed by the EMH, Bernanke and Yellen could not, or would not, even recognize the risk.

During the 1970s and 1980s, EMH helped reduce the number of quantitatively talented individuals entering the money management business.

The S&P 500 is within ±19% of its trend two-thirds of the time. Volatility is 19 times more than justified by underlying fundamentals, caused primarily by individual investors driven by behavioral factors that result in herding – non-experts simply feel more comfortable in a herd, and being wrong on your own is the cardinal crime for an investment manager so managing career risk results in very destructive herding and a great deal of extrapolation.

Extrapolation dominates the workings of the market. Keynes said extrapolation is a convention we adopt even though we know from personal experience that it is not applicable in the real world. For example, in 1982, 30-year bonds peaked at a 16% yield as inflation touched 13% so to extrapolate a full 13% inflation is as foolish as extrapolating currently very low inflation for 30 years. The same is true for extrapolating profit margins.

Economist Hyman Minsky said periodic financial crises were well-nigh inevitable because a form of extrapolation would occur with stability generating more risk-taking and on into a spiral until something inevitably would go wrong.

Despite high UK housing prices, the UK government is encouraging more leveraged mortgages, guaranteeing new mortgages over 5% that will further push prices up so that new buyers can only afford houses at low mortgage rates.

Read the full article at http://online.barrons.com/article/SB50001424053111904253404579207793809107008.html#articleTabs_article%3D1

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GMO’s Jeremy Grantham on Climate Change and Investable Ideas – BloombergBusinessweek 08-08-13

Salient to Investors:

Jeremy Grantham said:

  • The biggest issue we face is deterioration of the environment, particularly climate damage. In the US, the biggest problem is coal and tar sands.
  • If we burn half or more of the coal and tar sands in two areas in North America, there is no chance of avoiding very dire consequences: rising water levels displacing hundreds of millions of people globally, destabilizing global politics, acidification of the water almost certainly destroying most of the coral reefs, and possibly threatening the bottom of the food chain in the ocean.
  • In the investment business, our No. 1 job is not managing money but keeping our job, which is why short-term momentum investing dominates. Scientists do the same and make sure they’re conservative.
  • Young people are not flocking quite so enthusiastically to the financial world. They haven’t responded to climate change despite it happening so fast that this is their lives, not their children’s.
  • The only investable idea I have confidence in is farming and forestry.
  • Holistic is the world’s most pretentious word.
  • We have been manipulated to see ourselves in a world where only debt matters, only finance matters, only banking matters and therefore we have to be protective of the big banks.
  • The US will prosper by the quality and quantity of our labor and capital. How the Fed twitches around has no material effect.
  • I try not to miss the big ideas and forget the little ones.

Read the full article at  http://www.businessinsider.com/jeremy-grantham-on-the-fed-2013-8

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This fund tracks 36 bubbles—and 33 have completely popped – Quartz 08-06-13

Salient to Investors:

Jeremy Grantham’s GMO claims that of the 36 major bubbles it says it tracks, 33 have completely popped, or returned to their prior trends.

GMO’s more recent predictions, the Australian and UK housing market bubbles, have yet to pop. James Montier at GMO says investors are being force-fed higher risk assets at low prices, a product of central banks’ loose monetary policies.

Read the full article at http://qz.com/111094/this-fund-tracks-36-bubbles-and-33-have-completely-popped/

 

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This fund tracks 36 bubbles—and 33 have completely popped

The Cautionary Tale of Lord Grantham – Bloomberg 05-15-13

Salient to Investors:

Never put too much of your portfolio in a few investments, or in one country or industry. The employee with a significant chunk of his 401(k) in his employer’s stock, or gets his contribution matched in company stock, risks both job and  retirement plans if a setback for the company threatens.

Never put too much faith in an emerging market. Canada was the Brazil or China of its day; growing at an average of 6.7 percent per year from 1896 to 1912, and more than 10 percent in 1905 and 1906, even after inflation.

The IMF says emerging markets will grow 5.6 percent in 2013, while Morningstar says emerging market mutual funds attracted $26.2 billion over the past year, far more than any other equity fund category. The MSCI Frontier Markets Index is up 8.5 percent in 2013, 9 times more than the broader emerging-market index.

Jeremy Grantham at GMO says the problem with growth companies and growth countries is that they so often outrun the capital with which to grow and must raise more capital.

Read the full article at http://www.bloomberg.com/news/2013-05-15/the-cautionary-tale-of-lord-grantham.html

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