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Jeremy Grantham is aware of his reputation as an investing bear. He just doesn't think the label applies. The market's behaviour in the past two decades and his own investing decisions paint a significantly more complex picture than such a broad term would imply.
"If you can look back over the past 20 years, the market's been cheap 10% of the time," says Grantham, who co-founded GMO and will deliver a keynote presentation at the 2012 Morningstar Investment Conference in Chicago this week.
"If you were bullish more than that, you were into wishful thinking. I am very pleased--very proud--of the fact that I've spent 15 years pointing out that it's an overpriced market because that's how it's worked out. Nobody's made money in 20 years."
Looking Beyond the US
The "bear" label, Grantham says, derives from his attitude toward the most visible segment of the investing universe: US equities. He says value simply hasn't been there in decades, at least not to the extent that it has been in emerging markets and, from time to time, in fixed income. For investment advisers, Grantham says, a willingness to look elsewhere for returns rather than scouring for value in the increasingly desolate US marketplace--only a small fraction of the world's investment universe--is a service to their investors.
"I've been a roaring bull on emerging markets," Grantham says. "The market is so US-centric, the fact that I've been cheerleading for emerging [markets] and pooh-poohing the US is considered permanently bearish. I like to separate myself from the permabears. [With] US REITs, emerging markets, and even the US [equities] market for a small window in early 2009, I do come out of the bunker and try to make a little hay. The permabears stay permanently locked up, expecting further declines."
For the time being, fixed-income holdings have joined US equities in Grantham's doghouse. "Fixed income offers horrendously low guaranteed returns," he says. "Because of that, we have a very boring and neutral weighting in global equities and plenty of powder should one of the crises, such as in China or the European Union, blow up.
"Just on a pure value basis, European value looks very cheap; even without financials included they look very cheap. Emerging [markets look] cheap. Japan is cheaper than its long-term average. By mixing and matching those areas, you can get a real return of 7%, which is not bad."
Not Settling for Less
But Grantham points out that the pursuit of "not bad" is a problem. Persistently reassessing an investment strategy for fear of a lacklustre year is risky and can shackle investors when major opportunities arise. It's a vicious cycle for investors and advisors who have not built the confidence and patience to be able to endure lacklustre years while waiting for a major opportunity to emerge.
"You have to struggle with it as best you can," he says. "If you can handle it, the advantage is that those big bets that have the greatest career risks are of the highest value. If you're successful with those over your career, you will have the greatest success."
Impatience and marketplace uncertainty will always be obstacles for individual investors and their advisors, but Grantham indicates that things are vastly better now than they have been in the past 12 years. In 2000, "advisors had a worse, more difficult job than they do today," he says. "They were looking at outrageously high prices. They're much more reasonable today. That overwhelms any other concerns. If you were an investor in 2000, you were in trouble."
The recovery from that downturn drove up prices so high and so fast that nearly everything was inflated before the 2008 market collapse. "In 2007, every asset class on the planet was overpriced badly," Grantham says. "I described it at the time as a truly global bubble. Do you have the courage to go 100% cash or government bonds? That was the only reasonable strategy based on the numbers."
Making Resources Work
Among the macroeconomic themes Grantham's keynote will address is natural resources. He sees opportunities in forestry and farms as prices in those sectors rose in the past decade after a century of steady declines.
"I believe we're running out of resources," he says. "There was a very big phase change in 2002. After 100 years of price declines in real terms, we had a move upward. In 10 years, we gave it all back without making the cover of BusinessWeek. That seems to be a very big event; I've been hammering on that for four years."
Grantham says that his portfolios are approaching a 50% weighting in natural resources, and he remains confident in that investment despite short-term market corrections.
"I think the trend is up, and that makes a big difference for those who own the assets in the ground," he says. "This is the biggest change in the long-term business outlook I've seen in many, many decades."
