Being a Contrarian can be very lonely. All great investors find themselves very lonely as only contrarians become great investors. Jeremy Grantham has been lonely a very long time, but he is what I consider a Great Investor, along side Warren Buffet, Bill Gross and Julian Robertson. He first began calling for a market top in 1998 and acted accordingly by going primarily to cash by 1999. He saw the overvaluation of the internet bubble and the beginnings of a historic loosening of regulations while at the same time greed took over the American and then world culture.
So here we are in 2009, fully 11 years after Grantham and GMO first called for a top in the American stock market. They did get long Emerging Markets in 2000 and beat the market averages by doing so. Still, this long period of bearishness has made Grantham a bit of a pariah among the investment community. But Grantham has a lot to teach us about removing emotion from investing and staying hard against the tides of popular opinion: that is being a Contrarian.
The January/February 2009 letter reviews the past 11 years and the ideology shift that led to the market crash. It also discusses how the economy will come back from its depression and the likely direction of global markets over the next seven years. He handicaps the current "reflation" strategy and the likely resultant inflation and what that means for investors. It is a very long and somewhat arduous read as Grantham is a statistician and quant. But like with Dr. Robert Shiller who Grantham references and I think respects, the reader is rewarded with a 200 year history of investing and countless interesting and relevant antecdotes to our current situation. This is a newsletter to file away and review at least once a year for reminders of how Grantham arrived at his conclusions and whether they are proving true.
I will reference and link his 2009 Market Analysis published in two parts in January and February. More recently, on March 10, Grantham published a piece titled "Reinvesting When Terrified". I will also reference that letter and provide a link to a video interview with Jeremy Grantham by Steve Forbes.
Steve Forbes Interview with Jeremy Grantham - Video
Reinvesting When Terrified Jeremy Grantham
It was psychologically painful in 1999 to give up making money on the way up and to expose yourself to the career risk that comes with looking like an old fuddy duddy. Similarly today, it is both painful and career risky to part with your increasingly beloved cash, particularly since cash has been so hard to raise in this market of unprecedented illiquidity. As this crisis climaxes, formerly reasonable people will start to predict the end of the world, armed with plenty of terrifying and accurate data that will serve to reinforce the wisdom of your caution. Every decline will enhance the beauty of cash until, as some of us experienced in 1974, ‘terminal paralysis’ sets in. Those who were over invested will be catatonic and just sit and pray. Those few who look brilliant, oozing cash, will not want to easily give up their brilliance. So almost everyone is watching and waiting with their inertia beginning to set like concrete. Typically, those with a lot of cash will miss a very large chunk of the market recovery.
There is only one cure for terminal paralysis: you absolutely must have a battle plan for reinvestment and stick to it. Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones. A single giant step at the low would be nice, but without holding a signed contract with the devil, several big moves would be safer. This is what we have been doing at GMO. 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 denition 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.
Disclosure: No positions