I always enjoy reading Jeremy Grantham’s missives, and his most recent comments do not disappoint. They are packed with great tidbits and insight.

My favorite part was this list of “Lessons Learned in the Decade” — the full list is available at GMO.com.

Here is an abbreviated version:

• The Fed wields even more financial influence than we thought.

• Low rates have a more powerful effect on driving financial assets than on driving the economy.

• The Fed is capable of being extremely out of touch with the real world and more doctrinaire than anyone could have imagined.

• Congress is nearly dysfunctional, primarily controlled by large corporations;

• Government administrations can be incompetent for long periods.

• The leadership of major corporations can be very lacking in insight and competence on a fairly routine basis.

• The two time-tested investment tools, value (P/E ratios and P/B ratios) and price momentum, are now much more heavily used and not so reliable as they once
were, say from 1977 to 1997.

• Asset classes really are more inefficiently priced than individual stocks on average, and therefore offer greater opportunities for adding value and reducing risk.

• The Fed learns no lessons!

Fascinating stuff from Jeremy Grantham of GMO.


What A Decade!
Jeremy Grantham
GMO, 1/25/2010


Category: Bailouts, Federal Reserve, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

12 Responses to “Grantham: Lessons Learned in the Decade”

  1. ashpelham2 says:

    “The two time-tested investment tools, value (P/E ratios and P/B ratios) and price momentum, are now much more heavily used and not so reliable as they once
    were, say from 1977 to 1997.”

    This is a pretty telling statement to me. Those two measurements were leaned on during a time, but in the past 10-12 years, have become very cloudy. In late 98 through 99, PE ratios were so high, it seemed nuts to buy in. But prices kept going up. In 2000, they oversold, and PE ratios didn’t adequately reflect values.

    It’s been very hard for this investor to “pick a winner” during his investing lifetime. I admit I’m not the most skilled at it, but I’ve been fooled so much, and underwhelmed by long term performance even more, that buy and hold seems like more of trap than an investment philosophy. Amazing how many people I meet that still believe in that.

  2. MayorQuimby says:

    Not much to disagree with there!

  3. I don’t know Grantham, so I’m not sure if this “The Fed wields even more financial influence than we thought.”, is tongue-in-cheek, or not..

    But, if it isn’t, BR you may care to send him a Box of Porto Rico’s finest roast..

    or, differently, Are We F****** Stupid?

    and, We limit that observation to “Financial Influence”?

    maybe, “The FedRes, given a Currency Monopoly, wields as much Economic, and, Financial, Influence as it Chooses.”, would be, waay, more accurate..

  4. d4winds says:

    re: “The Fed wields even more financial influence than we thought.”

    True, but only when it is not expected to wield such influence. The Fed’s success as lender of last resort or (08-09) as an interventionist in reducing credit spreads depends on the markets expecting it to not act thus.

  5. [...] Jeremy Grantham’s “Lessons Learned in the Decade.”  (Big Picture) [...]

  6. rustum says:

    How does Gold and Silver looks on chart? Are they week. Gold is moving along with S&P so far.

  7. farmera1 says:

    “Congress is nearly dysfunctional, primarily controlled by large corporations;”

    If you thought this was bad last decade wait until this decade with recent SCoUS ruling that corporations can give to/buy/bribe politicians with out limits. As the saying goes,” you haven’t seen anything yet.” This party is just starting.


    Freedom of speech for corporations (artificially created entities). Suppose that is what the framers of the Constitution had in mind when they wrote the bill of rights. I doubt it. THis will get real ugly in a hurry.

    First Amendment to the Constitution

    “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.’

  8. DL says:

    If not for those damn corporations, the U.S. would have no debt, no unfunded liabilities, and we’d have lower taxes, and higher economic growth.

    Bring in the trial lawyers, the environmentalists and labor unions to run the economy.

  9. Mannwich says:

    “Perceived” influence, that is. Mass delusion often works well…….until it doesn’t.

  10. TakBak04 says:

    Jeremy Grantham’s missives are an excellent read..

    I’ve read his stuff before but lost touch somewhere along the way and was reading Bill Gross more than Grantham.

    Actually going to the site and reading more beyond what you focused on is also a good read.

    What I wonder about with you “BR” is that your “Fusion IQ” seems to be so much more optimistic than the links to folks you agree with and what seems to be your own views of the stuff you post here on your blog for us to read.

    I guess you’ve said you are a Contrarian…but it must be hard to operate given the dire predictions of the folks predictions you link your blog readers to. Most of the folks you link us to are seeing very hard times for US Markets in the coming years.

    Yet, your own charts and signals seem to be based on “market sentiment through charts” which somehow seem linked too much to the Quant Side of Math…rather than the Sociological Sentiment of Crowds.

    When folks don’t have money out there…they need to cash in those 401-K’s to pay mortgage or the credit cards in default… and the older crowd just won’t go near this crazy market having been wiped out by the implosion of 2000, 2001…2007 and ’08 . But, remember they got wiped out by the “Dot Com. Crash” and then went into Real Estate and also at the end back into stocks in their “fixed income” stuff. I’m talking about the older folks, here who still had some cash left to burn and were still employed enough that they’d saved some stuff, even after the two Bubbles. They’ve BURNED IT or had it burned by investments in schemes (think of the Florida and Greenwich Crowd burned by Madoff and his cronies living the “high life.” There’s some dark stuff out there, but assume that “Fusion IQ” and others seem to have strategies that feel they can work around this?

    So…Who is Left to Invest? EXCEPT the BIG GUNS? And how is it that there are “BIG GUNS” who have anything left after “Hair on Fire …we are poor and on the brink and we are going down unless TAXPAYERS GIVE US THE MONEY! I guess that’s the splitting of the Big Pie into slices. What’s left over..the rest of us have to make money out of just to make that living in these times.

    Anyway…I liked Grantham’s views….and I’ve always been a big reader of Bill Gross’s Newsletter every month. Bill Gross has made me money on his calls. Whatever he does in his investing life…his newsletter is “very populist.” And his sense of irony and humor is great for “between the lines” reading. I made money on his “TIPS” (actually the investment) and when he warned to get out of it….I cashed in. He’s been warning not to buy bonds. For a Bond Billionaire to say that…gives him lots of creds for the “small investor.”

    Whatever… I assume your views are making money for your clients who probably have very different goals that some of us out here who have some substantial cash…but are hugely cautious and like to “micro-manage” our own stuff and have done well enough that we won’t change. LOL’s ….Contrarian….

  11. stevenstevo says:

    Yeah, not sure about the P/E ratios comment, especially when Grantham repeatedly makes reference to the P/E ratio throughout the letter. No one relies on a single figure indicator like this. They will of course use a P/E ratio, but no investor relies on it, precisely for the very reasons that anyone (e.g., Grantham) can prove are stupid do so. Everyone knows you cannot reduce complex decisions to a single figure. Everyone knows P/E ratios fail to account for capital structure–I think I learned this in third grade.

    Dude nailed his ten year projections for 1990-2000 though. Actually, if luck had nothing to do with it as Grantham says, then that’s nothing short of sheer genius. In reality, however, it was nothing but luck. Indeed, if Grantham had truly believed in his own projections for US “risky stocks” then he would have shifted his funds’ equity weighting to zero and loaded up on emerging market equities and on bonds given their substantially lower risk (and his higher projections for fixed income).

    Not only that, but it doesn’t make sense that Grantham is predicting returns for US equities for the next seven years will essentially mirror the long-term historical us equity return average when he also later says the the market is worth “850 or so.” The S&P 500 is currently hovering around 1,100. Perhaps Grantham made a mistake in his projections and actually meant to forecast -7% US equity returns.

  12. cognos says:

    These statements mostly dont make sense (other than the Congress/corp control one).

    Grantham can be interesting, but he’s tragically contrarian, and his l-t performance sucks. I do give him credit for being a perma-bear who went bullish in Feb/Mar 09 (back to bearish by May/June).

    Bill Gross is smarter, has 100x better perf, and so he runs 10-20x the money.