Jeremy Grantham: How Low is Low?

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27-oct-1b.jpgI published the first part of Jeremy Grantham’s latest newsletter, “Reaping the Whirlwind”, on this site a week ago. The second part of the report, “Silver Linings and Lessons Learned”, has also now been published.

Here is an excerpt from the report by the chairman of Boston-based GMO:

“When asked by Barron’s on October 13 if we would learn anything from this ongoing crisis, I answered, ‘We will learn an enormous amount in a very short time, quite a bit in the medium term, and absolutely nothing in the long term. That would be the historical precedent.’

“That is unfortunately likely to be the case. But over the next several years at least, there are many silver linings and valuable lessons to be learned.

“Chief among the many benefits of this crisis are unprecedented opportunities for investing in some fixed income areas where some spreads are so wide as to reflect severe market dysfunctionality.

“As of October 18, we also have moderately cheap US and global equities for the first time in 20 years. Probably quite soon, global equities too will offer exceptional opportunities after the additional pain that is likely to occur in the next year.

“We are reconciled to buying too soon, but we recognize that our fair value estimate of 975 on the S&P 500 is, from historical precedent, likely to overrun on the downside by 20% to 40%, giving a range of 585 to 780 on the S&P as a probable low.

“The world faces unavoidable declines in economic activity and profit margins, so this overrun is unlikely to be much less painful than average, although you never know your luck.”

Click here for the full report on Grantham’s comments on lessons learned from the credit crisis, as well as his proposed strategy.

Source: Jeremy Grantham, GMO, October 2008.


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1 comment to Jeremy Grantham: How Low is Low?

  • Frank Wordick

    Grantham redeems himself here by admitting that he is buying too early. He has to, because he has too much money flowing in that he has to put somewhere. The following statement that he made to Barron’s is arguably the best comment he has ever made about anything: “We will learn an enormous amount in a very short time, quite a bit in the medium term, and absolutely nothing in the long term.”

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