Category Archives: Jeremy Grantham

Jeremy Grantham’s Quarterly Letter

The always insightful Jeremy Grantham of GMO recently released his 2011 fourth quarter letter. The letter is free to view but registration is required on GMO’s site.  I highly recommend it.

This quarter’s letter focuses on GMO’s investing themes for 2012 and there is also a dedicated section to the deficiencies of capitalism.  However, the letter opens with “investment advice from your Uncle Polonius”. I have put the 10 bullet points below, but for the full effect the letter is worth your time. Point 5 is encouraging for those of you managing or hoping to manage your own assets:

1. Believe in history.

2. “Neither a lender nor a borrower be.

3. Don’t put all of your treasure in one boat

4. Be patient and focus on the long term

5. Recognize your advantages over the professionals

6. Try to contain natural optimism.

7. But on rare occasions, try hard to be brave.

8. Resist the crowd: cherish numbers only.

9. In the end it’s quite simple. Really

10. “This above all: to thine own self be true.

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Investment Readings

With the US equity markets in daily roller-coaster mode, below are investment articles offering big picture analysis beyond just the daily market swings and headlines:

Rainbow Convergence Has Predictive Value – Tom McClellan

Changing the Rules in the Middle of the Game (pdf) – John Mauldin

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Desperate Times Call for Drastic Measures – Bob Eisenbeis, Cumberland Advisors

US Government Debt Crisis Hovers in the Background, Part 1 and Part 2 Here – Satyajit Das

Adam Hewison’s Daily Market Video Update (free):

It’s All Very Taxing (pdf) – Howard Marks

Is This the Best Stock Market Indicator Ever? (part 1) John F. Carlucci

Secret Fed Loans Gave Banks $13 Billion – Bloomberg

Grantham Calls Corporate Profits Freakish – Bloomberg

Apple Computer: Massive P/E Compression – Systematic Relative Strength

Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments and its author is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

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Investment Readings

Below are a few investment articles for Friday and through the weekend:

Gold and Silver Stocks – Frederick Sheehan courtesy of The Big Picture

Grantham: ‘No market for young men’ – MarketWatch

Preparing for a Greek Default – John Hussman

Recent Market Trends Remain in Place – Get Positioned! Chris Vermeulen

Implied Volatility: A Better Way to Gauge Risk – Geoff Considine

Twist and Shout? (pdf) John Mauldin

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Weekend Readings

Below are a few articles I’m reading –

Can Jeremy Grantham Profit from Ecological Mayham? NY Times

The Beginning of the Endgame (PDF) – John Mauldin

Summer Gold Rush Pulls Money into Gold ETFs – Tom McClellan

10 Myths That Politicians Want You to Believe – The Big Picture

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Reflections on Correction 2: This Summer It’s Different – Dan Alpert, via the Big Picture

The Geopolitics of Brazil (pdf) – Stratfor

Uncertainty and Indecision Threaten Bank America and Global Markets – Christopher Whalen

How the Fed Got Itself Boxed In – Barry Ritholtz

Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

Investment Articles

Below are a few investment related articles for what has already been a wild week:

Danger: Children at Play – Jeremy Grantham, available directly at GMO’s website with free registration. An excerpt:

My worst fears about the potential loss of confidence in our leaders, institutions, “and capitalism itself” are being realized.  We have been digging this hole for a long time.  We really must be serious in our attempts to resuscitate the “average hour worked” and the fortunes of the average worker.  Walking across the Boston Common this morning, I came to realize that the unpalatable (to me) option of some debt forgiveness on mortgages looks increasingly to be necessary as well as the tax changes I discuss here.

To go further, if we mean to prosper long term, I am sure we need to act to make debt less attractive to everybody:  it really is a snare and a delusion.

Where Are Markets Headed? Examining Critical Levels on S&P Futures, Key Indicators – Tim Thielen

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Breakfast with Dave (pdf) – David Rosenberg, republished via John Mauldin

Change We Can Believe In – Paul Brodsky

“All that had changed was people’s opinion of the place” – Mebane Faber

Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

GMO’s 7-Year Asset Class Return Forecasts Warn of Low Returns

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GMO has released their 7-Year Asset Class Return Forecast report for May 31st 2011.  The report can be viewed on their website with free registration.

The projected 7-year returns for a variety of asset classes are very low and warn of overvaluation in equity markets.  Below is a table I created of the various projected asset class returns.  GMO is not the only company warning of low long-term returns – John Hussman of Hussman Funds has repeatedly projected muted long-term returns and in his weekly commentary for this week stated their 10-year total return projections for the S&P has “barely cracked 4%” even after the recent selloff.

What is an individual, self-managed investor to do if he or she agrees with these assessments? An investor could simply short the market or what you believe to be overvalued segments of the market. However, if shorting is not for you, then one option is to wait for a further sell-off to purchase high quality stocks at a more reasonable valuation.  However, this process can be agonizing when markets have strong momentum as they did for much of 2009 and 2010.  Valuations tend to overshoot the average and can remain over or under valued for extended periods of time. Thus, another option is to watch long-term momentum signals (such as the 200-day moving average or 10-month moving average) for buy/sell signals and also combine this with a valuation metric.  Scott’s Investments tracks long-term momentum signals using the 10 month simple moving average for a variety of ETFs in three different portfolios (the strategy background is available here).

For example, an investor could track the P/E 10 ratio (the price/earnings ratio based on the historical 10 year average of earnings) of the S&P 500 (updated at on a monthly basis) and invest only percentage of funds to a momentum strategy when the market is “overvalued”. When the market is adequately or under valued, a larger percentage of funds could be allocated to a momentum strategy.  As of June 1st the S&P 500 had a P/E 10 of 23, versus the historical average of 16.4, which places the market on June 1st in the top (i.e. most overvalued) quintile. The Aleph Blog also recently wrote an interesting article on a  model that attempts to capture both value and momentum.

Asset Class Projected Return
US Large 0.0%
US Small -2.7%
US High Quality 4.3%
International Large 3.5%
International Small 0.6%
Emerging 5.1%
US Bonds 0.1%
International Bonds -1.3%
Emerging Debt 1.7%
Index Linked Bonds -0.2%
Cash -0.6%
Timber 6.0%
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Mid-Week Market Readings

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Below are a few articles of note from this week:

Jeremy Grantham: Time to Wake Up – Days of Abundant Resources and Falling Prices Are Over Forever (summary is from Investment Postcards from Cape Town, the full article is available at GMO’s website with free registration

Physical Silver Investors Are Being Hoodwinked by the Futures Market – Dian Chu

The Mess in Europe (pdf) – John Mauldin

Managing Exposure to Extreme Markets – Geoff Considine

Monetary Policy in 3-D – John Hussman

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Spooky Investment Readings

The Big US Banks’ Biggest Problem – Jim Jubak

10 Ways to Survive a Zombie Economy – Jim Jubak

How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America–and Spawned a Global Crisis – John Mauldin’s Outside the Box

QE2: What’s an Investor to Do? – David Kotok

Night of the Living Fed – Jeremy Grantham (free registration required at

  • Summary of Night of the Living Fed available here from Prieur du Plessis

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Mid-Week Reads

Summer Essays – Jeremy Grantham (pdf)

A Hard Rain Lies Ahead – Richard Russell via Investment Postcards

Europe’s Delusion of Safety –  Satyajit Das

Don’t Take the Bait – John Hussman

Investor Clues in Latest Earnings – Jim Jubak

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Important Weekend Read, Jeremy Grantham

I always look forward to Jeremy Grantham’s Quarterly Letter.  His April 2010 letter is now available for free on GMO’s site (free registration required).  Below are some excerpts I found noteworthy:

“The massive bailout program stopped the meltdown of the financial system and engineered at least a temporary economic recovery. We know the obvious cost of this bailout: unprecedented deterioration of the Federal balance sheet. But what of the less obvious costs incurred by taking away the rewards of caution by saving the reckless and incompetent? These weak enterprises, financial and other, were not gobbled up by the stronger, more prudent,and more competent natural survivors, and there is a longterm cost in that.”

 “If, however, the economy only limps along, which seems more likely to me, then we run a very real danger of a third dangerous bubble in stocks and in risk-taking in general. For in that event, Bernanke will defi nitely keep rates low quarter after quarter and speculation will surely respond.
Again? Yes, I’m afraid so. In that environment, Bernanke will do nothing to let the air out gently. His lack of antibubble action is pretty much guaranteed. The end of such events is always hard to predict, but usually bubbles break for almost any reason when they are big enough. Of course, the larger the asset bubble, the bigger the shock to the economic and financial system.”

“…the line of least resistance is a market move in the next 18 months or so back to the old highs, say, 1500 to 1600 on the S&P, accompanied by an equivalent gain in most risk measures, followed once again by a very dangerous break. If that happens, rates will still be low
and thus diffi cult to use as a jump starter, the fi nancial system will still be fragile, and the piggybank will be more or less empty. It is remarkably silly for the Fed to allow, even encourage, this fl ight path. It is also remarkably silly for investors to be so carefree, given their recent experiences. Fortunately, there are several less likely outcomes that collectively, I hope, are equally probable. We are defi nitely playing with fi re and need some luck. The best kind of luck would be that Bernanke gets bitten by a Volcker bug.”