Jeremy Grantham, chairman of Boston-based asset manager GMO, is feeling vindicated. In 1998, Grantham recalls, he forecast that in 10 years the total inflation-adjusted return of the Standard & Poor's 500-stock index would be -1.1%. In October, "it slashed through that, and marked the end of the Great Bubble," he says.
Now, Grantham, whose firm manages more than $120 billion in assets, is almost gleeful. The value manager, who earned the sobriquet "perma-bear" for his long-standing bearish outlook, is buying. Like Warren Buffett and a growing number of savvy value investors -- among them, Third Avenue Management's Marty Whitman and Longleaf Partners' Mason Hawkins -- Grantham is seeing opportunities in the cheap prices created by this autumn's rapid stock market unraveling. Stocks, Grantham says, are now cheaper than they've been since 1987. "You are looking at the best prices in 20 years, and you should be making 7% to 8% to 9% real (inflation-adjusted) returns. The last time I was this optimistic was in the summer of 1982."
Not that Grantham's blindly upbeat. "It's optimism with great trepidation," he says. That trepidation reflects the fact that Grantham doesn't know if the market will fall further. But he's not the type to try to time the bottom. In fact, he says, bubbles historically overcorrect, and usually quite dramatically. That's what happened after the stock market crash of 1929, the 1965 collapse of the Nifty Fifty, and the contraction in Japan in 1989. "We are reconciled to buying too soon," says the money manager. "A value manager buys too soon and sells too soon. That's the nature of the beast."
Values at Home and Abroad
Grantham, who is repositioning both his personal portfolio and his clients' funds, has "equal enthusiasm" for emerging markets stocks and high-quality U.S. blue chips.
Among U.S. stocks, Grantham's betting on big-cap blue chips -- the most solid of companies with strong franchises, little debt, and stable history. "I'm not personally recommending Coca-Cola, or J&J, or P&G but these are the essence of what I am talking about," says Grantham. "These super-high-quality franchise companies got left behind in what I call the 'greatest suckers' rally. They are cheap and have been cheaper than the market for a long time."
Overseas, Grantham is looking at emerging markets, which are trading at around 25% off from what he considers their fair value, making them the cheapest prospects. Within emerging markets, he particularly likes Brazil. However, he's pessimistic on commodities, which he believes could be pushed to new two-year lows on slowing growth prospects in China and elsewhere.
What about financials, that most battered of battered sectors? Grantham's not as pessimistic on them as he's been previously, but he still prefers to invest elsewhere. "I don't think financials would make the list," he says, "but I think they are cheap relative to long-term expectations."
With a stomach of steel and a keen sense of history, Grantham feels no qualms about buying now: "I don't have any anxiety. I feel so much better with history on my side. Truly. I've been looking forward to this for years."