When would you rather buy the Nasdaq? On March 23, 2000, at 4,940... or yesterday, at 1,512? Back in early 2000, one well-known professional investor turned incredibly bearish... He's one of the few pros who invested during the last great bull market in the late 1960s. He'd just gotten out of school and he quickly made enough money in the stock market to pay off his debts, buy a BMW, and even a nice house. Then he lost it all... Come 2000, he didn't forget the lesson. He called the top in the markets with more conviction than any other professional investor. I have a ton of respect for him. He willingly gave up millions in fees from customers to stick with his belief that stocks were heading for a fall. Customers who didn't want to believe him simply took their money and gave it to managers who promised bigger gains. But this investor turned out to be exactly right... In early 2000, Jeremy Grantham predicted stocks would lose 3.9% per year annualized for the next 10 years.  Back then, he said:

I challenge anyone to tell me with a straight face that I'm using seriously bearish assumptions – because I'm most definitely not. My assumption of a 17.5 P/E is above average. My assumption of a 6% profit margin is way above average. And 4% sales growth is so high – so optimistic – that it's loony. And yet it still only gets me to a total return of a negative 1.9%...

 

If I assume a 2% sales growth instead, I arrive at an estimated return of a negative 3.9% per year. That's starts to get more like it – closer to reality.

He was predicting the worst 10-year period in history for U.S. stocks, including the Great Depression. We're nine years into his prediction. And he got it exactly right. So what's Grantham saying today?  Today, Grantham is predicting the opposite of what he said in 2000. When the Nasdaq was at 5,000 he said sell. Now, he's saying buy. He predicts that, over the next seven years, many different types of stocks will return just under 11% a year. (In particular, he says high-quality U.S. stocks, international small-cap stocks, and emerging-market stocks will make these returns.) Grantham expects you could do even better – 13% a year (or more) over seven years in these areas – with active portfolio management. In plain English, you could turn $100,000 into nearly $250,000 in seven years. Investors are worried about buying in now... They're worried about the banks and about unemployment. In Grantham's most recent article (available atwww.gmo.com), he talked about this same scenario back in the Depression:

Long before all the banks had failed or unemployment had peaked, the S&P rallied 105% in six months...

 

The market does not turn when it sees a light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.

The man who called the 2000 peak with more conviction than any other professional investor is now calling the bottom... The man who willingly gave up millions in potential fees from customers to stick to his principles is now finally optimistic on stocks. We should listen. Good investing, Steve