To excel in any area, it is vital to learn from the master. The field of financial investments is no different wherein there are not too many strong and sane voices as Jeremy Grantham, a Harvard educated British investor and co-founder of GMO, a Boston-based asset management firm.
He is also credited for starting one of the world's first index funds in early 1970s.
Here, we bring forth his categorical viewpoints on some of the important market movements such as bubble, inflated stock prices, blue chips, among others.
Bubbles in market: About market bubbles, he said, valuation or expensiveness is no guide for when the bubble can break. “Some break much cheaper than others. A much better guide to when it will break is the behaviour. You wait until this crazy behaviour takes hold, you wait until the market has accelerated — not just the going up, but the rate of ascent,” he added.
Stock pricing: In terms of overpricing in the market, market crash in 2021 in the US market was even worse than 1929, he said. But he clarified that the market, this time, will not be as bad as during the great depression.
“In terms of crazy investor behaviour, it was quite likely to be worse than 1929. Thus, this possibly was the most spectacular bubble; of course, not as big as the one in Japan in 1989. However, in 1929, the government got everything wrong in its response. I am not suggesting that now. I don’t mean that it will get so ugly as 1929 and we will have a depression,” he said.
Bluechips and speculative stocks: He says that all previous market downfalls have had one consistent pattern. When markets go down, speculative stocks go down but not the bluechips, at least not significantly.
He says the large investors, during the crazy long bull markets, shift towards the bluechips. They don’t do anything like that at any other time.
“Chuck Prince, the former boss of Citibank, famously said in 2007 — he had to keep dancing, the music was still playing; to which George Soros later said, actually, the music had stopped but he just hadn’t heard it. But they are not completely stupid. They don’t have to dance with the most speculative stocks. So, they dance with the CocaColas and other blue-chips. And it worked in the sense, these companies survived,” Grantham said.
PE ratios to decline: About future outlook, he says that nothing is certain in life, but probably the markets, particular in the West, are going back to a more normal pre2000 world.
“The PE ratios will tend to decline over the next 10 or 20 years. They may not go back to the average of the 20th century, but they will very likely decline in that direction. The bubble breaking this time superficially is like 2000, but then may morph into the 1970s — inflation, higher rates, lower profits and shortages,” he says.
What should investors do? Mr Grantham says that investors should try to identify cheap stocks in attractive industries. He also cautions investors against nurturing heightened expectations of making the kind of money they made in the past 10 years.
“Opportunities like what one got in Amazon or Google in the early years of this century are going to shrink,” he said.
How to see if stock is overpriced? While sharing tips of measuring the market, he says that to see if market is very expensive, investors should remember that it is not just about the PE ratio, but also the profit margins which are mean reverting in the long run.
Investors should see what is the normal PE and normal profit margin, which equals a fair price. “Anything below that, you should be interested; anything above, you should be ready to get kicked,” he says.