Hi Guys,
Based on my earlier posts, I’m sure many of you recognize that I’m extremely skeptical about market forecasting. There are too many moving parts and unknown interactions.
When Alfred Cowles 3rd asked the question in 1932 “Can Stock Market Forecasters Forecast ?” he answered in the negative. I share similar doubts. My doubts magnify as the forecasting time horizon expands.
So I don’t respond too aggressively when a market wizard projects returns for next year. Barron’s annual roundtable forecasting party amply demonstrates the popularity of the ritual. It’s reliability is highly suspect. Here is a Link to an article that addresses “Forecast Fatigue”:
http://blogs.cfainstitute.org/investor/2012/01/12/forecast-fatigue-whats-the-value-of-annual-market-predictions/ As you know, Jeremy Grantham has been a member of the forecasting crowd since about 2000. Unlike most everyone else, he makes a forecast for a 7 year period. His original forecasts were for a 10 year time horizon so he has shortened his foresight timeframe.
His most recent projections are scary indeed for US equities. If you believe he possesses the Wisdom of Solomon you might completely abandon the US equity marketplace and embrace foreign holdings. Here’s a Link that provides a summary chart:
http://www.gurufocus.com/news/248085/gmo-7year-asset-class-forecast--getting-bullish-on-emerging-markets-january-2014Most folks consider Grantham to be the gold standard in terms of forecasters. I’m likely swimming against the prevailing strong tide, but I’m not convinced.
He did not generate especially sterling results for the 7 year period just ending. I completed specific analyses as an acid test. Way back in July 2007, he projected real negative returns for both large cap and small cap US stocks similar to today’s predictions.
Adjusting for inflation (Grantham makes real return estimates), his 2007 projections for June 30, 2014 become marginally positive, but well below US Treasury expectations. His forecasts were definitely off-target. Stocks outperformed bonds in this 7 year period by a considerable percentage, and small caps marginally outperformed large caps which also contradict the 7-year predictions. Yes, forecasting is certainly hazardous to a reputation.
Although in this instance I take issue with the trustworthiness of his specific long range projections, I do admire the process embedded within Grantham’s work, his meta-market modeling approach, his work ethic, and the man himself. He is both smart and humble, a rare set of qualities in the investment guru world.
Allow me to take liberties with Shakespeare and reverse a few key words: “I have come here to (praise) Caesar, not to (bury) him”. I write to praise Jeremy Grantham, not to criticize him. He is a true giant and superstar in the investment community. When he speaks, I respectfully and intensely listen. A few times we part ways.
I am particularly fond of Grantham’s “10 Shakespearian Rules of Investing”. Here is a Link to a short summary of his rules followed by a Link to a quarterly Grantham letter that details them in the first 3 pages of his long letter:
http://www.businessinsider.com/jeremy-grantham-gmo-quarterly-letter-polonius-2012-2?op=1http://www.gurufocus.com/news/163788/jeremy-granthams-q4-longest-quarterly-letter-everJeremy Grantham is a true believer in the investment iron law of a regression-to-the-mean. So am I.
I especially like the closing section of his tenth rule, so I’ll repeat it here:
……..“On the other hand, if you have patience, a decent pain threshold, an ability to withstand herd mentality, perhaps one credit of college level math, and a reputation for common sense, then go for it. In my opinion, you hold enough cards and will beat most professionals (which is sadly, but realistically, a relatively modest hurdle) and may even do very well indeed.”
I believe many MFO members easily qualify by satisfying the attributes Grantham cited.
Good luck and Best Regards to all. Have a great summer.
Comments