The Market Wizard
Investing guru
Jeremy Grantham riffs on the stock market, the
housing bubble, and why our treatment of the environment could be
our riskiest bet of all.
. Photograph by Steve Moors.
All you need to know about investing legend Jeremy Grantham sits
just to one side of his desk, overlooking the breezy wharves of
Boston. It's a massive stone Buddha, standing about four feet high
and weighing hundreds of pounds, that made it all the way here from
ninth-century Java.
First, the Buddha's serene gaze implies "everything in moderation,"
meaning bubbles come, and bubbles go, but things always drift back
to the middle. And second, Grantham, 68, got the statue for an
absolute steal during the Asian currency crisis back in the late
'90s, when antiquities from the region just weren't selling. "So I
called up Sotheby's after the auction and made a bid far below the
reserve price," he remembers. "They said, 'Yes, please!'?"
Now that's the instinct of a true value investor.
And it's the kind of attitude that has made Grantham - chairman of
investment-management firm Grantham, Mayo, Van Otterloo & Co.
(GMO) and its $121 billion in assets - the kind of money manager
that other money managers listen to. Understandable, when you
consider that he has popped up at the most revolutionary movements
in modern investing. Investments that are indexed to track the
market's performance? He was a pioneer. Small-cap investing, for
people who want a piece of tiny-but-growing firms? His too.
International investing, to take advantage of markets around the
world? He was among the first. Quantitative investing, for "numbers
nerds" who are able to find value in reams of company data? You get
the picture.
"If there's anybody in this whole business who calls a spade a
spade, everyone would say that person is Jeremy Grantham," says
John Bogle, an investing legend and the founder of mutual-fund
giant the Vanguard Group. "He pulls no punches and is one of the
top two or three individuals in this business. He's a straight
shooter in a business where that's not a customary
characteristic."
It's not cheap to profit from Grantham's market wisdom,
unfortunately: The price of poker to be a GMO client, most of which
are institutions, is a minimum $10 million. But for the rest of us,
GMO also
subadvises a number of mutual funds available to the general public
through Evergreen Investments, John Hancock Funds, and the Vanguard
Group.
Grantham isn't just a market geek, though the messy stacks of data
on his desk might give that impression. He also has some amusing
personal quirks, like his obsession with textiles (he collects
everything from old Uzbek bridal embroideries to fifteenth-century
swaths of Venetian velvet).
But if there's one thing he's dead serious about, it's the world's
casual ignorance of coming environmental crises. Much like his
approach to the markets, he's peering long-term at what's heading
down the pike, and he doesn't necessarily like what he sees.
Grantham, who has started a foundation for environmental protection
with his wife, Hannelore, isn't sure enough people are paying
attention.
"It just seems obvious to me," he says. "This is where we live, so
why mess it up? We're the richest society ever, so we need a
version of the Manhattan Project to protect the environment. What
we're facing is serious - and irreversible."
Playing Defense: Surviving and Thriving in a Downturn
If Grantham is as right about the environment as he was about the
Internet bubble, then we're all in a heap of trouble. In the late
'90s, when tech stocks were skyrocketing and everyone and their cab
driver were getting rich, he was practically yelling from the
rooftops about the coming bust that would wipe everyone out.
It cost his firm - big. As investors turned away from his
conservative philosophy and rode the bubble instead, GMO lost 45
percent of its assets under management at the time - but because of
market conditions, the company ended up sinking only 33 percent,
from $30 billion to $20 billion. Going against the conventional
wisdom "brought the firm to its knees," Grantham remembers. He and
his fellow managers were seen as fuddy-duddies who had lost their
way, old-fashioned cranks who just didn't get the realities of the
new Internet age.
But in 2000, when the stocks all came crashing down, his
value-oriented philosophy got a bittersweet vindication. While the
investors who had abandoned him were losing their shirts, those
who had stuck with him emerged from the bust relatively unscathed.
"We looked like heroes," he says. "But it was a pretty obvious bet.
By any standard measure, everything was screaming at you to
duck."
And that nicely sums up his approach to the markets. At any given
moment, some asset classes may be rocketing to bubblelike
proportions, and others may be out of favor and absolutely cheap.
So buy the bargain, and don't shovel your money into assets that
are already ridiculously expensive, because everything will
eventually revert back to the mean.
That instinctive caution has led many to tag Grantham a
"permabear," someone who's always pessimistic about the markets.
He's not a fan of the term, though. A worrier, maybe: He does think
we're in the middle of a long-term bear market, one that started in
2000 and that may not end until 2010, at the earliest. But
according to Grantham, he's just calling the market as he sees it.
If an asset class is in a bubble, he'll say so. And right now, a
lot of different assets are looking awfully pricey. Stocks, bonds,
real estate - generally speaking, all are valued higher than they
should be.
Looking Ahead: Where to Place Your Bets
That's not to say there aren't wise investments to be made, says
Grantham. One of the best at the moment? Boring old cash.
Fixed-income investments (bonds) are also looking more attractive
than they have been, and Treasury Inflation-Protected Securities
are fairly valued. Emerging markets - developing countries like
India,
China,
Brazil, and so on - are probably the best long-term
bet in equities, and they're relatively cheaper than U.S.
stocks.
His biggest idea for the moment: that superhigh-quality investments
- perennial market powerhouses like Johnson & Johnson, for
instance, pose little risk and have a solid record of churning out
big profits year after year - are a much better value than riskier
ones. Because right now what he calls the "risk premium" is "the
lowest you'll ever see in your lifetime." In other words, you're
not getting a discount to take risks with your money, as you
normally would. When this is the case, you should buy the big,
proven moneymakers instead of the fluctuating small-cap growth
stocks, because you're getting them at a bargain.
But the immediate question posed by anyone with a 401(k) is: How
will the market fare this coming year? Grantham reminds us of the
predictability of presidential cycles, which reveal a "remarkable"
set of data. Historically, during the first year of a presidency,
the market is up very slightly. In the second, it's down
significantly; in the third, it rockets upward; and in the fourth,
it's up more marginally.
That kind of pattern isn't random. As they start to face reelection
prospects in their third year, administrations tend to goose jobs,
cut interest rates, and spend the cash necessary to make sure the
economy is humming when voters go to the polls. And here's the good
news: We'll soon be entering the third year of the younger Bush's
second term. If historical patterns hold, that could mean a
pleasant year for investors, although Grantham doesn't recommend
you count on this. "In the end," he says, "value is more important
than these technical indicators."
Of course, in Grantham's view, the fundamentals don't warrant such
a powerful bull run. It almost pains him to admit it. But he's
enough of a realist to know that pure reason doesn't always drive
the markets. "You don't get rich fighting Year Three," he quips.
The Real World:
Thinking and Investing Globally
Grantham loves to make his investors rich - investors who
reportedly include longtime political foes John Kerry and Dick
Cheney (although the tight-lipped company declines to discuss its
clients). His firm has outperformed the
market for seven consecutive years.
That's partly thanks to Grantham's global perspective, which helps
him spot opportunities around the world. And that stems from his
upbringing: A native of England, he studied at the University of
Sheffield before making his way to
Harvard Business School. As a
self-styled
mid-Atlantic personality - one whose stubborn English
accent remains, if only in watered-down form - he sees U.S. stocks
as only one piece of a much larger puzzle.
If American stocks are outlandishly expensive, for instance, look
abroad. A prime example: A few years ago, Grantham estimated that
stocks in emerging markets were cheap. So he loaded up and then
benefited as equities in developing countries outperformed almost
every other market sector.
It's those same global instincts that fuel his passion for
protecting the environment - in small ways, like with the few
hundred acres he and his family own in
Panama that he's currently
replanting with a variety of trees, and in larger ones, like with
his foundation's newly minted prize that it was recently awarded
for environmental journalism. "He's a very smart philanthropist,"
says
Carter Roberts, president of the
World Wildlife Fund in
Washington, D.C., the world's largest privately financed
conservation group. "He's always pushing and prodding me to find
the right solutions. Not just by creating parks on the ground in
places like
East Africa or the
Amazon, but in getting companies in
the U.S. to source their timber and paper in a more sustainable
way. It's really remarkable."
Indeed, Grantham now dreams of harnessing the power of the media to
change public attitudes about the environment on an even grander
scale, much like former vice president
Al Gore seems to have done
with his film on global warming,
An Inconvenient Truth, which
brought a key message to a mass audience. If public attitudes can
be altered, Grantham hopes enough pressure can be brought to bear
change in government behavior. And then there might be some real
hope that we won't burn through all the earth's resources before we
realize it.
In this way, Grantham's approach to the environment is very much
like his approach to investing. He searches for just the right
opportunity - whether it's battling infestation in American forests
or planting trees in Panama - and runs with it. "He places bets on
people and ideas the same way he invests money," Roberts says. "He
looks for inspiring people who have great ideas, helps refine those
ideas, and then gives them the resources to take those ideas to
scale. And he's been very successful at it."
Not that Grantham would trumpet the fact. He's not a limelight
seeker; he's content to work behind the scenes at his cluttered
desk, ferreting out the long-term trends that are going to change
the markets and the world. "I just try to be right more often than
not," Grantham says, smiling at the understatement. "And it's
worked, I must say."
Master Class
Jeremy Grantham may seem like an unassuming type with his avuncular
sweep of white hair and rumpled clothes. But when it comes to
saying what he thinks, he's brutally honest - and has no fear about
upending conventional wisdom. A Grantham classic: "Very hard work
gets in the way of thinking." He's also famous for saying that just
one or two good investing ideas a year are sufficient. (He's since
amended that - to one idea every couple of years.) So we
administered the truth serum and asked Grantham for his unvarnished
opinion of the hot-button issues roiling the world economy.
On Oil: "It's a finite resource meeting the world's most
inept energy policy. It's not renewable; we're eventually going to
pump it all, and yet American drivers can't stand a higher tax on
gas. Europeans live with gas at $7 or $8 a gallon, but Americans
can't. It's a sacred cow."
On Real Estate: “Housing bubbles are rarer than stock bubbles, and right now it’s at its highest point ever. It’s not as volatile an asset as stocks, but we’re in the early stages of housing coming down more than it ever has before. In some markets, like
Boston, it may go down 20 percent; in other markets, prices may simply flatten.”
On Hedge Funds: “Hedge funds may have changed something serious about the usual rhythms of the markets. This is $1.2 trillion, leveraged three-to-one. So it’s actually $3 trillion that’s unregulated, that can move on a dime — and does. They’re also taking very good people, so we always have to fight it out with them.”
On Bubbles: “Bubbles will always happen, as people follow the rising asset class. From time to time, things get horribly overpriced. The only thing that’s uncertain is the timing of when a bubble will end.”
On Bear Markets: “Most money managers got into the business after 1982 and have experienced a long wave of happiness. But the laws of nature have not been repealed. There are always risks that the economy could unravel. But I stay optimistic because we have a history of muddling through. So stay alive, duck, and wait for better opportunities.”