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Grantham: You will never catch the low
Tuesday, March 10, 2009
Jeremy Grantham, Chairman of the Board of investment management firm GMO (Grantham Mayo Van Otterloo), is about as bullish as a bear could possibly be.
See? It's a rather simple process.We made one very large reinvestment move in October, taking us to about half way between neutral and minimum equities, and we have a schedule for further moves contingent on future market declines. It is particularly important to have a clear definition of what it will take for you to be fully invested. Without a similar program, be prepared for your committee’s enthusiasm to invest (and your own for that matter) to fall with the market. You must get them to agree now – quickly before rigor mortis sets in – for we are entering that zone as I write. Remember that you will never catch the low. Sensible value-based investors will always sell too early in bubbles and buy too early in busts.
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Life is simple: if you invest too much too soon you will regret it; “How could you have done this with the economy so bad, the market in free fall, and the history books screaming about overruns?” On the other hand, if you invest too little after talking about handsome potential returns and the market rallies, you deserve to be shot. We have tried to model these competing costs and regrets. You should try to do the same. If you can’t, a simple clear battle plan – even if it comes directly from your stomach – will be far better in a meltdown than none at all. Perversely, seeking for optimality is a snare and delusion; it will merely serve to increase your paralysis.
4 comments:
Although I agree with the traditional investment approach being touted, it would be remiss to follow the approach without at least accounting for the possibility that the rules of the market fundamentally change. Obviously you don't want to buy into that possibility without some good rational evidence to support it (see: the pundits sayings the rules had fundamentally changed justifying ridiculous P/E's during the dot-com bubble), but it's worth giving it at least some accounting, in my opinion.
As an extreme example, consider investing in a health care company which provides medical services. You might want to buy when the fundamentals look good, but if the US nationalizes the entire health care industry as some people are suggesting (notably, predominant people in the party in control of the government currently), you could lose your entire investment, regardless of how good the fundamentals were when you bought it. A more realistic example might be the housing market currently, where uncertainty about tax law changes is certainly factoring into some people's investment decisions.
That doesn't mean you don't want to buy when fundamentals are good, of course, but the more extraordinary the times are (and/or the more fear the government can use to enact radical changes to the laws in furtherance of agendas), the more cautious you should be about game-changing events. Nationalization, socialism, currency instability, unrest, etc. are all game-changers, and all are possible in the next decade (or much sooner).
Practically noone brings up the fundamental change question and only a few dare to mention the long-term nature of market cycles. Guys like Buffet and Grantham may end up looking foolish when all is said and done.
Sell after the peak starts to fade and buy after the bottom has been reached and the rebound begins, and hope like hell it ain't a bounce.
Personally, I think Buffet and Graham et all are spot-on with their approach to long-term investing, and their value investing theory doesn't lose any validity if the fundamentals change; they just implicitly frame their investing strategies in the context of no game-changing events. For example, when Buffet talks about Berkshire's risk exposure, there's always an element of chance which could kill their profits and capital reserves, it's just not mentioned because it's discounted. For example, if there was a catastrophic natural disaster, the government could force Berkshire to pay out on insurance policies, even if the policies had an exclusion for the event; that would be devastating for Berkshire, but it's not even considered, because it's outside the framework of assumptions for the system they are evaluating in.
Similarly, Graham's investing philosophy is based upon capitalism and the free market. If Obama decides to emulate Chavez and start taking over industries in the name of helping the people against the evils of big corporations (kinda like imposing arbitrary "excess profits" taxes, just a couple small steps further), that changes the game, and the framework in which Graham developed his philosophy is no longer applicable. When the government went off the gold standard and outlawed private possession of gold so they could print money without it being devalued immediately, that was a game-changer. Etc.
I'm not sure exactly what an investor can be sure of in the next 4+ years in the Obamanation. Lots of things can happen against the context of a lot of fear, uncertainty, and widespread blind self-flagellating desire for the government to do more to "help". Even if you knew something was priced well using today's rules and systems, how can you predict what your actual realized return might be if the government is working against the "evil wealthy greedy capitalists", and is willing, able, and eager to change the rules?
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