Jeremy Grantham: Train Wreck Spotter?

by: CXO Advisory Group

A reader suggested that we evaluate the stock market forecasts of Jeremy Grantham, Chairman of GMO LLC. GMO LLC "is a global investment management firm committed to providing sophisticated clients with superior asset management solutions and services." Its "client base includes endowments, pension funds, public funds, foundations and cultural institutions." The predictions/recommendations evaluated here extend as far back as August 2000 and come from columns in MarketWatch, CNN/Money and The table below presents highlights from his commentary and shows the performance of the S&P 500 index over the 21, 63, 126 and 254 trading days after the publication date for each item. Red plus (minus) signs to the right of specific items indicate those that the market has subsequently proven right (wrong). We conclude that:

  • Most of Mr. Grantham's comments derive from his quarterly letter to clients and from media interviews.
  • His forecasts are generally long-term, but he occasionally comments about near-term expectations for the overall U.S. stock market. Evaluating long-term forecasts is problematic due to difficulty of constructing a large sample of reasonably independent forecasts.
  • He develops forecasts based mostly on fundamental valuation and macroeconomic/financial analyses, as modified by the effects of the Presidential term cycle.
  • Mr. Grantham has been persistently very negative about the prospects for U.S. equities (apparently since 1994), but not for international equities.
  • Based on our judgment, Mr. Grantham's forecast accuracy rate is about 27%, which is very poor. His forecast sample size is very small, as is our confidence in this score.
  • His strong pessimism drives GMO managed funds toward the most stable (large capitalization) value stocks, and these funds have performed fairly well (reflecting perhaps a value premium rather than market timing).

In summary, Jeremy Grantham has a very poor track record for predicting U.S. stock market behavior. The sample size for Mr. Grantham is very small, as is our confidence in this conclusion.

See Guru Grades for a snapshot of the accuracy of various experts in predicting the direction of the U.S. stock market, including links to evaluations of the commentaries of other individual market pundits and gurus.

We are not including Mr. Grantham's results in that snapshot at this time because of the very small number of graded forecasts.

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