Smart Investors Agree

by | Aug 11, 2001 | Archives

Here is some sage advice from a very wise and proven investor!

We can gain some excellent information from this week's Barron's. Thereis an interview with Jeremy Grantham a Boston-based money manager to whichinstitutions and individuals have entrusted $22 billion, Grantham isone of the most respected U.S. fund managers and is best known for hisacumen in relative values represented by different asset classes andmarkets worldwide. The web site for this interview is

Since this site is part of Wall Street Journal's subscriber only service Ihave reviewed what the article covered below.

In this interview Grantham agrees with many of my concerns (that I haveexpressed in recent messages) about the current dangers of U.S.shares. But he added some positive thoughts about value shares I alsowant to share here with you..

One of his most important thoughts is that the market currently offers thegreatest value rally in history. He believes we are nowhere near thestart as it took three years digging the biggest hole by far in 21 years,and one year leaping out of it. At the end of June, 95% of everything helooked at registered a new high in terms of relative performance againstits benchmark. A year ago, that seemed almost infinitely unattainable. Itseemed as if the recovery would take three or four years. Yet it took onlya year.

Gratham feels that in March 2000, value shares had never been cheaperrelative to growth shares. He feels this was the all-time, world-recordlow — by a wide margin. Value shares are 20% cheaper than normal. Inthe case of small-cap value shares such as the Russell2000. International small-cap are the best equity bet around now andthere is still room left from a value manager's point of view becausethese great cycles, can last 5-6-7 years and they always overrun when theyare recovering from an extreme move.

He states that the Internet-telecom-tech bubble was the biggest bubble byfar in American history. Bigger than the railroads, bigger than anything.To put it in perspective, the S&P peaked at 21 times earnings in 1929. In1965, in the other great cycle, the post-war cycle, it again peaked at 21times earnings. Both cycles were built on incredibly strong earnings andproductivity gains. In this cycle the index peaked at 33 times earnings,and even now the S&P's P/E is still at 26 times earnings. The long-termaverage is 14. but Gratham believes the P/E will come back to 17½.

Gratham sees opportunity (as I do) in emerging equities on Argentina bonds, fixed income, and inflation-protectedbonds. He sees a handsome but risky return in emerging-market debt. Hethinks REITs [real estate investment trusts] are the biggest no-brainer ofthe entire cycle. When the market peaked in March 2000, the real-estateindustry represented by REITs yielded 9.1%.

In the article he states that when a cycle or bubble breaks it so crushespeople's euphoria that they become absolutely prudent for the balance oftheir careers. (See links to “Weaker Dow” article and article “Here is tofreedom).

However his near-term forecast is that the market will rally on aneconomic recovery. Anytime now, there will be a fairly decent broadpickup, led by the consumer because of the tax cuts and because of themany interest-rate cuts. He feels it probably will be a decent recoveryand in this kind of knee-jerk stock market, at the first sign of a healthyeconomy the stock market will kick up 10% at minimum, 20% at best.

He feels this will create one last great opportunity to lower risk bymoving into asset classes with higher implicit returns, of which thereare, happily, in his opinion, plenty including real estate, REITs,emerging equity, emerging debt, inflation-protected government bonds,regular bonds, small-cap value around the world and his favorite assetclass, timber.

I'll continue this message tomorrow with more about investments in timberand value markets, but here let me tell you more about the timber andopportunity here on our farm.

Dawn comes wet on the Blue Ridge. Early light filters through valleysmists. Crystal sparks of dew hang on ripened blackberries, nature'sjewels that shine in the morning sun. Birds sing, joyous for life and themiracle of another day.

Our farm schedule is one reason why our courses here change lives. Thougheach course has a financial slant, (either how to invest or have your ownbusiness) and though we advertise the benefits of knowledge and contacts,we also immerse delegates in fresh air, pure water, nature and if theychoose exercise, an Andean rejuvenation diet, yoga andmeditation. (Others just sleep in and gain extra rest in the peace and quiet).

Our land is fortunate. Parts have never been logged and are covered withhuge, ancient trees. During our breaks many delegates love to nap intheir shade.

Details below explain what our upcoming course is about. Our luxuryaccommodations are now filled, but you can stay in one of the luxury homerBuffalo Creek tipis or at a near by motel, so why not join us here at thefarm, stimulate your mind, enhance your knowledge, increase your valuablecontacts and energize your future.

Until next message on Jeremy Grantham's additional thoughts, good globalbusiness and investing!