Jeremy Grantham: Beware of terminal paralysis

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As the stock market indices are flirting with key charting levels and we are waiting for Mr Market to show his hand, it is useful to get an update on the outlook from Jeremy Grantham.

Grantham, chairman of Boston-based GMO, was a great skeptic between 1999 and October last year when he started propagating “hesitant and careful buying”. His latest thinking has just been reported in an interview with CNN Money as quoted below.

“Meanwhile, GMO chairman Jeremy Grantham is more upbeat – though he does expect more pain to precede any recovery.

“Looking back at historic bear markets, Grantham draws comparisons to 1974 and 1982, when the S&P 500 lost roughly half its value. Since he estimates the current S&P 500 fair value at 900, Grantham puts his worst-case bottom at a hair-raising 450.

“‘That’s fairly scary, but on the one hand we look at the massive stimulus, and then on the other we try to work out the fact that the global economy is in worse shape than it was in ’74 or ’82,’ says Grantham. ‘I’d say there are three-to-one odds that we go to a material new low. We should count on [the S&P 500] hitting 600 for a little while, and we should hope like mad it doesn’t get deep into the 500s.’

“Patience rules. Another looming threat is that the market may enter an extended period of drops and rebounds that flatten long-term returns and strand buy-and-hold investors for decades.

“Japan’s stalled stock market is one recent example, but the U.S. has had its shares of quagmires, too. Grantham likes to point out that investors who bought at market crests in 1929 and 1965 had to wait 19 years each time just to break even.

“Still, Grantham says buy-and-hold still makes sense for long-term investors when stocks are trading below fair value. He especially favors U.S. blue chips, and his fund is on a strict, slow schedule to invest as valuations dip even lower.

“‘If you don’t have a schedule for investing, you will not do it,” he says. “When the market goes down, it reinforces the hoarding of cash. By the bottom, you suffer what we called in 1974 terminal paralysis – you cannot pull the trigger. Almost everyone who avoids the great pain is very slow to get back.’

Source: Eugenia Levenson, CNN Money, February 25, 2009 (hat tip: Investorazzi).

Related posts:
Jeremy Grantham: Obama and the Teflon Men, and other short stories
Jeremy Grantham: Obama and the Teflon Men, and Other Short Stories (Part 2)
Forbes Interview: Jeremy Grantham – the bear buys stocks

 

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6 comments to Jeremy Grantham: Beware of terminal paralysis

  • Excellent article, as are all from Grantham. Most of us knowing that our re-invested money is worth most at lower PE find it very difficult to fight the emotion of cash hoarding at times of significant market drops. On the other hand, looking at lowered earnings with single to low double digit multiples, S&P of 500 seems a possibility.

  • Brian H

    I am way too impoverished to invest, but if I did, I’d follow what I have dubbed a “three month rule”. (Or more prezakly, a 100-day rule for easier arithmetic.)

    At some point when you have reached an adequate level of confidence that a bottom will occur sometime in the next 100 days, initiate a scheduled buy-in (arrange in advance with a broker so the fractional bits can be made workable) of 1% of a given amount of money per day for that period. Then stop. And wait. If you are right about the bottom occurring anywhere in that period, you’ll have done about as well as it’s reasonably and humanly possible to do, and have shut out some of the influence of market-sucker-psychology.

    Similarly, if you believe that a top (or “the” top” is likely in the next 100 days, sell 1% per day through that period.

    The 100 days is long enough to provide a decent margin of error, while capturing most of the benefit to be had from catching the market at a turn without getting suckered by impulse plays or formulas that are dynamically changing in unpredictable ways.

    It is important not to balk or chicken out part way through. Let the periods play out, or you defeat the purpose.

    As stated, you’d need a pre-set arrangement or deal with a broker to minimize transaction costs, etc. Shopping around should get you someone willing and able to handle the regimen without bleeding you dry.

  • Jim

    The key is to know when to enter and exit. When the 50DMA crosses the 200DMA on the S&P we will be in a Bull market again. Until then I think it is fine to dollar cost average into short positions.

  • Frank W

    Anybody who puts money into the stock market at this point in the game ought to have his head examined. The bloody market has just broken 20 November 2008 support (and 2002 support as well) and is heading south. Earnings projections for the S&P 500 are around $16 and fair value is computed to be something above 200 at a P/E ratio of 15. Why would anyone want to buy now unless he had a death wish? Buy and hold my foot!

  • Lou O'Neill Jr.

    dear prieur–welcome home…a GREAT post and particularly enjoyed the way brian h. described a method of averaging in…now how does one find a broker who’ll accomodate???…remember…they don’t ring a bell when we hit THE low…that said, caution HAS TO BE THE ONLY GAME IN TOWN…if one has 100 k allocated for the market…well…why not split it four ways and committ at various levels???…and…don’t forget gold either…it’s a crazy world we live in and everyone should be able to sleep at night…regards from a chilly rego park…your personal thoughts re. europe would be most appreciated…Lou O’Neill…-30-

  • […] more discussion about the direction of stock markets, also see my recent posts “Jeremy Grantham: Beware of terminal paralysis” and “Video-o-rama: Let’s move beyond the ‘N’ word“. (And do make a […]

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