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Jeremy Grantham’s March 2009 Letter: “Reinvesting When Terrified” at Trader’s Narrative

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Jeremy Grantham, Chairman of Grantham Mayo Van Otterloo, is one of the few that saw the financial crisis coming. In 2007 he wrote, warning that we were caught in “The First Truly Global Bubble“. There was only one asset class that liked back then, and even that didn’t fully escape unscathed.

But Grantham isn’t a perma-bear. Since the brutal bear market, his views have changed completely. Here’s a preview of his newest letter to GMO clients:

Jeremy Grantham GMO March 2009 client letter

In his letter, written before last week’s gains, he says that the market is fully valued at appx. the 900 level:

For the record, we now believe the S&P is worth 900 at fair value or 30% above today’s price. Global equities are even cheaper. (Our estimates of current value are based on the assumption of normal P/Es being applied to normal profit margins.) Our 7-year estimated returns for the various equity categories are in the +10 to +13% range after inflation based on an assumption of a 7-year move from today’s environment back to normal conditions. This compares to a year ago when they were all negative!

Then he discusses briefly how GMO is handling the dilemma of either moving too early, and having to endure further losses, or moving too late and giving up gains as the market moves up:

… you absolutely must have a battle plan for reinvestment and stick to it. Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones. A single giant step at the low would be nice, but without holding a signed contract with the devil, several big moves would be safer.This is what we have been doing at GMO. We made one very large reinvestment move in October, taking us to about half way between neutral and minimum equities, and we have a schedule for further moves contingent on future market declines.

Of course, he is an institutional investor, having to position billions of assets. But the lesson is the same no matter the size of your account. You must have a battle plan laid out before hand so that when the market reveals itself, you know exactly what to do and aren’t caught off guard.

You can read the whole March 2009 letter from GMO in the Free Trading Resource section - in the Reports & Articles folder, where you’ll also find other interesting reports, articles and even complete trading books.

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One Response to “Jeremy Grantham’s March 2009 Letter: “Reinvesting When Terrified””  

  1. 1 Uli

    Many educated Investors predicted the market to collapse years before the financial crisis started. With oil prices soaring, the dollar and interest rates on the rise, and people overcapitalizing on bad debt around the world, it is no wonder we have reached financial trouble. We think that when times are going well that it is the norm and base our financial decisions on a rising market, when things start to bottom out and we have a correction it starts a chain reaction and the house of cards begins to fall.

    Sophisticated investors knew that this was coming and got out when times were good. As Warren Buffet says: “be fearful when others are greedy, and greedy when others are fearful” The smart investors sold to the uneducated investors chasing the quick buck and the ones who left their money with so called “financial experts” -many of them losing more than half of their clients 401k (or superannuation). While the uneducated investors follow the line of sheep jumping off the financial cliff, the money is transferred to educated investors waiting until they can buy when the market hits rock bottom.

    The simple truth is: If you don’t understand it, don’t invest in it. That saying also applies to giving your money to someone else. The best way to secure your financial position is to educate yourself and prepare yourself so that when times get tough you can not only survive, but have enough reserves to invest in opportunities that arise when the markets are down. You make your money when you buy, not when you sell. The only question that is left is what is the right time? When will these markets turn? -and that is something no one knows, the only thing we can do is to be prepared.

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