The Man Who Called the Crash Now Likes Stocks
By Dr. Steve Sjuggerud
November 11, 2008
Some call legendary money manager Jeremy Grantham a "superbear."
Back in 1998, when stocks were soaring, Grantham made a prediction: Stocks will lose 1.1% a year over the next 10 years. Investors, expecting 20%+ returns a year, took their money out of his fund. He wasn't promising enough compared to his peers.
In hindsight, Grantham was exactly right. (It took 10 years and three days to equal his prediction.)
Whenever Grantham writes something or grants an interview, I pay attention. He's one of Wall Street's few independent thinkers. I think guys like Steve Leuthold, Bill Gross, and Grantham are always worth reading. I may not always agree. But I value their opinions because I believe they're not sugarcoating anything.
(Once I was in New York with Bill Gross, and I thanked him for writing his Investment Outlook letter. I asked him whether being so outspoken angered his readers. He answered jokingly, "Half the people that read it think I'm not telling the truth, and the other half disagree with me... So I'm in the clear.")
Grantham has been quite vocal lately, in the Wall Street Journal, Barron's, The Economist, and most tellingly in his quarterly letter to shareholders.
In his letter, Grantham explains he's optimistic about stocks: "For an unparalleled 20 years, global equities, especially U.S. equities, have been overpriced. Now, finally, they are cheap and likely to get cheaper. Likely, I believe, to set up a once-in-a-lifetime investing opportunity (or maybe twice in a long career)."
Ever humble, Grantham says he suffers from the Value Investor's Curse: "I said as far back as 1999, while suffering from selling too soon, that my next big mistake would be buying too soon."
Grantham thinks the economy still has a ways to fall. In a Wall Street Journal interview, he said, "We are in the teeth of the biggest financial crisis since the Depression and the early days of the broadest economic slowdown since 1982."
But Grantham is quite OK with being a bit early buying stocks. He's a long-term investor. Every quarter, Grantham publishes his seven-year forecast for the investment returns on all major asset classes. In this quarter's forecast, Grantham expects high-quality U.S. stocks and stocks in emerging markets to return more than 10% a year over the next seven years, under a good manager.
While everyone was bullish a decade ago, independent thinker Jeremy Grantham was practically the lone superbear – to the detriment of his firm. But he was right.
Now, "the crowd" is scared. And Grantham is nearly alone (except for Warren Buffett) in buying stocks.
I'll put my money on Grantham and Buffett over the crowd any day. At current prices, stocks could earn you double-digit annual returns over the next seven years if Grantham is right. Here's hoping he is...
Good investing,
Steve
Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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IT'S A BEAR MARKET IN EXPENSIVE, BULL MARKET IN CHEAP
A look at the list of stocks hitting new yearly lows is a look at the big bear market in expensive food.
You might hear about this bear market through stories on America's top "luxury grocer," Whole Foods. Shares in "Whole Paycheck" have declined 75% this year as folks have eliminated their $500 grocery runs. Expensive steakhouses Ruth's Chris and Morton's are also getting clobbered... down 80% and 79%, respectively, since January.
The story here is pretty simple. When folks are having trouble paying off the car and home loans, they're more likely to eat $2 burgers than $20 steaks. Which brings us to an amazing chart today... the past three years in McDonald's.
As Tom predicted in July, McDonald's has held up incredibly well through the market turmoil. McDonald's sells the cheapest burgers and fries in the world. And while stocks of all types have been recently destroyed, Ronald's profits and shares have held steady. Expect this trend of "bear market in expensive, bull market in cheap" to continue.
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Soon after General Motors announced a huge third-quarter loss of $4.2 billion, and that it was burning through an additional $2.3 billion a month, CNBC host Larry Kudlow said automakers should not be given any more taxpayer cash.
"We should not be pouring bad money after bad money" Kudlow said on the financial news channel.
"They should have to make major, surgical, structural changes."
Kudlow's comments follow a report in The New York Times that automakers would ask Congress for double their previous request to as much as $50 billion in government-backed loans so that they can build more fuel-efficient cars.
"The taxpayers cannot possibly finance their burn rate cash problems," Kudlow said. "They need to go into bankruptcy."
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Deutsche Bank downgraded General Motors Corp. to sell from hold, with a price target of $0, saying the car maker may not be able to fund its U.S. operations beyond December without government intervention.
Deutsche Bank said it believes the U.S. government will be compelled to intervene through a capital infusion or loan. "Without government assistance, we believe that GM's collapse would be inevitable, and that it would precipitate systemic risk that would be difficult to overcome for automakers, suppliers, retailers, and sectors of the U.S. economy," the broker said.
Even if GM avoids bankruptcy, equity shareholders are unlikely to get anything back, it added.
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