The New Rules for Value Investors – Jeremy Grantham
The past few years haven’t been kind to value investors like Jeremy Grantham, founder of money manager GMO (Grantham Mayo Van Otterloo), who rose to fame after calling the stock market crash of 2000.
He says the mean reversion principles that accurately guided investors from 1935 until about 2000 have been circumvented since then. What has changed is that since 1998, price-earnings ratios and profit margins have outstripped their historical averages, giving the advantage to growth investors. That change stems largely from the massive monetary easing implemented under Federal Reserve Chairs Alan Greenspan, Ben Bernanke and Janet Yellen from the late 1990s until now, Grantham says.
This doesn’t mean the cupboard is bare for GMO’s portfolio managers. Going forward, Grantham, 78, sees investment opportunities in agriculture and clean energy, thanks to climate change and resource constraints. He finds emerging markets appealing too.
Grantham recently chatted with Wealth Management.com about these topics and his views on financial advisors.
WealthManagement.com: What are the most interesting changes you’ve seen in the investment business since you began in 1968?
Jeremy Grantham: The market was extremely well-behaved from 1935 until 2000. It was an orderly world in which to be a value manager: there was mean reversion. If a value manager was patient, he was in heaven. The market outperformed when it was it cheap, and when it got expensive, it cracked.
Since 2000, it’s become much more complicated. The rules have shifted. We used to say that this time is never different. I think what has happened from 2000 until today is a challenge to that. Since 1998, price-earnings ratios have averaged 60 percent higher than the prior 50 years, and profit margins have averaged 20 to 30 percent higher. That’s a powerful double whammy.
Diehard Ben Grahamites underestimated what earnings and stock prices would do. That began to be a drag after 1998.
In 2000, there was a classic bubble driven by the technology sector and eventually it blew up, leaving us well-positioned. In the Greenspan-Bernanke-Yellen era, the market rallied on housing, and then there was the first truly global bubble in 2007, creating another opportunity to ply our trade. But underneath the surface things started to change.
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