Grantham Interview

[nwoodman]

Similar topics to what was in his recent letter.  Always enjoyable though.  His comments on emerging market value resonate and may work out well for companies like FFH

 

 

Cheers

 

nwoodman

[shamelesscloner]

"We've got an artificial interest rate structure that has been driven down all over the world into negative territory, and we're going to use that as a yardstick? We're going to say stocks are cheap because they are less utterly ludicrous than a 30-year bond? This is not typically the way you measure things." -Jeremy Grantham

 

[mattee2264]

 

Problem is you have to invest your money somewhere so the 4% growing FCF yield you can get on US equities is a lot more attractive than the 1% fixed coupon you get on bonds.

 

 

[widenthemoat]

 

Problem is you have to invest your money somewhere so the 4% growing FCF yield you can get on US equities is a lot more attractive than the 1% fixed coupon you get on bonds.

 

I would make the argument that you don't have to invest your money somewhere. I think that institutional investors "have to" invest their money somewhere, so they can generate fees and stay in business, but that does not mean it is the rational or correct thing to do. Case in point, Berkshire Hathaway is sitting on $140 billion of cash.

[Guest cherzeca]

 

Problem is you have to invest your money somewhere so the 4% growing FCF yield you can get on US equities is a lot more attractive than the 1% fixed coupon you get on bonds.

 

I would make the argument that you don't have to invest your money somewhere. I think that institutional investors "have to" invest their money somewhere, so they can generate fees and stay in business, but that does not mean it is the rational or correct thing to do. Case in point, Berkshire Hathaway is sitting on $140 billion of cash.

 

it depends on whether you want to create wealth or preserve wealth, but neither is particularly easy. if LT rates go up, then FI will destroy wealth just as surely as an equity market correction. there are no right answers or solutions, just trade offs. cf Thomas Sowell.

[shamelesscloner]

 

Problem is you have to invest your money somewhere so the 4% growing FCF yield you can get on US equities is a lot more attractive than the 1% fixed coupon you get on bonds.

 

I would make the argument that you don't have to invest your money somewhere. I think that institutional investors "have to" invest their money somewhere, so they can generate fees and stay in business, but that does not mean it is the rational or correct thing to do. Case in point, Berkshire Hathaway is sitting on $140 billion of cash.

 

You certainly aren't limited to US bonds or equities. As mentioned by Grantham, certain emerging markets are offering much more attractive returns on a valuation basis. There are other alternatives like cash-flow producing real estate, peer to peer lending, etc. And DOING NOTHING may very well be the most rational option in the near term.

[Cigarbutt]

Problem is you have to invest your money somewhere so the 4% growing FCF yield you can get on US equities is a lot more attractive than the 1% fixed coupon you get on bonds.

I would make the argument that you don't have to invest your money somewhere. I think that institutional investors "have to" invest their money somewhere, so they can generate fees and stay in business, but that does not mean it is the rational or correct thing to do. Case in point, Berkshire Hathaway is sitting on $140 billion of cash.

it depends on whether you want to create wealth or preserve wealth, but neither is particularly easy. if LT rates go up, then FI will destroy wealth just as surely as an equity market correction. there are no right answers or solutions, just trade offs. cf Thomas Sowell.

From a certain perspective, a question needs to be answered: is moving from a low-yielding asset to a higher-yielding asset a positive move from a risk-return perspective or is it reaching for yield?

Mr. Sowell's work applied to this likely means that one believes in efficient markets ie the market will tell you if the price is right, if not interfered with, which does not always apply (isn't this why such a forum exist?).

It may be useful to compare the individual opportunity set and adjust expectations accordingly instead of doing the opposite. It may make perfect sense (risk-return perspective and under selected circumstances) to hold onto zero-yielding or even negative-yielding assets, in the present, instead of moving into higher-yielding assets, in the present. i wonder if that's what Mr. Buffett meant a few months ago.

So, along the irremediable cycles, if the Sowell framework is rendered semi-strong, over time, individual intentional rationality will result in more systemic rationality.

[shamelesscloner]

Problem is you have to invest your money somewhere so the 4% growing FCF yield you can get on US equities is a lot more attractive than the 1% fixed coupon you get on bonds.

I would make the argument that you don't have to invest your money somewhere. I think that institutional investors "have to" invest their money somewhere, so they can generate fees and stay in business, but that does not mean it is the rational or correct thing to do. Case in point, Berkshire Hathaway is sitting on $140 billion of cash.

it depends on whether you want to create wealth or preserve wealth, but neither is particularly easy. if LT rates go up, then FI will destroy wealth just as surely as an equity market correction. there are no right answers or solutions, just trade offs. cf Thomas Sowell.

From a certain perspective, a question needs to be answered: is moving from a low-yielding asset to a higher-yielding asset a positive move from a risk-return perspective or is it reaching for yield?

Mr. Sowell's work applied to this likely means that one believes in efficient markets ie the market will tell you if the price is right, if not interfered with, which does not always apply (isn't this why such a forum exist?).

It may be useful to compare the individual opportunity set and adjust expectations accordingly instead of doing the opposite. It may make perfect sense (risk-return perspective and under selected circumstances) to hold onto zero-yielding or even negative-yielding assets, in the present, instead of moving into higher-yielding assets, in the present. i wonder if that's what Mr. Buffett meant a few months ago.

So, along the irremediable cycles, if the Sowell framework is rendered semi-strong, over time, individual intentional rationality will result in more systemic rationality.

 

"You should always adapt your consumption to your income, you shouldn't try to adjust your income to your consumption. That's a basic principle of investing. Reaching for yield is really stupid, but it's very human." -WB

[Guest cherzeca]

I agree with guys like Grantham that the Fed's/ECB's financial repression has created a dangerous mispriced market, but I am not one for kvetching, I rather prefer action plans, and very few of these market kvetchers seems to have on offer something sensible to me (Baupost has access to opportunities that I cant access). my current plan is to have a sizable cash allocation, a less sizable US based equity allocation that is mostly index funds, and an even less sizable US based allocation to an event driven special situation. not interested in EM which is certainly outside my constrained circle of relative competence.

 

if only one of these kvetchers simply said, match the market and you will do better than most folks, likely including the kvetcher community, then I would respect them more.

 

true family based anecdote: there was a distant relative, a very successful doctor who didnt know financial markets, who in the 1960-70s asked another older distant family relative, a very successful businessman, what he should invest in, provided it offered safety and a satisfactory return. the businessman said long term govt bonds would suit your requirements.  so the doctor bought a bunch of long term T bonds and forgot about them. come the late 1970s-80s and exploding interest rates, the doctor's bonds were hammered, and his only consolation was that he had outlived the businessman. heard him tell me this story over a brunch...that I paid for.

 

kvetching is easy, giving good advice is hard.

[mattee2264]

In a sense by sitting in cash waiting for lower market valuations and therefore higher prospective returns you are reaching for yield.

 

Perhaps the new normal is higher valuations and lower returns especially if investors are now confident that the Fed will do whatever it takes to prevent a bear market.

 

Perhaps the market will go higher for a while longer and then go sideways for a number of years as earnings growth and multiple compression offset one another. And even if there is a weak economic recovery you'd expect low interest rates to support share buybacks that could drive earnings higher. 

 

In both these scenarios there is no guarantee that you will get to invest at much lower market levels and while you are waiting inflation is eroding the purchasing power of cash.

 

Grantham's argument is that we are in a bubble and it will burst in the coming months resulting in a large market decline that the Fed will be helpless to prevent. That would of course be a strong reason to sit in cash or to seek shelter in less expensive segments of the investment universe such as emerging markets or value stocks.

 

But it is very difficult to see an imminent 30%+ market decline. For that to happen you would need sentiment to swing from mania to depression and there is no obvious trigger for that. Nor is it likely that the Fed will raise interest rates too fast especially as it seems to be going out of its way to avoid a taper tantrum.

 

 

 

[SharperDingaan]

Most of this is simply because OPM is forced to invest in paper assets. The more 'uncertain' the market becomes, the more that 'risk adverse' money flows into OPM, and the fewer investable opportunities there are. Yield continually falls, the feedback loop accelerates, and instability significantly worsens. All OPM need do is earn a few bp more than the competitor, and not blow up - 'cause the customer has nowhere else to go.

 

Very narrow POV  ;)

 

All that you really need do is privately buy the things that people actually need. Buy the apartment block, as everyone needs a place to sleep. Buy and lease out the robots, packaging lines, CNC machines that do real things. Banks/investors, the world over, are throwing long term money at you, at ridiculously low rates. No whining shareholders, no quarterly earnings pressure to meet 'targets', and OPM works for you - for free. Down the pike, IPO your private business when you're ready, and become very, very rich.

 

You don't make wealth trading bits of paper - you privately own the underlying businesses themselves.

 

SD

 

 

 

 

[Guest cherzeca]

"But it is very difficult to see an imminent 30%+ market decline. For that to happen you would need sentiment to swing from mania to depression and there is no obvious trigger for that. Nor is it likely that the Fed will raise interest rates too fast especially as it seems to be going out of its way to avoid a taper tantrum."

 

keep your eye on the South Africa covid variant.  if that explodes and resists current vaccines, you will see a big downdraft

 

[mattee2264]

 

It might have a modest impact on cyclicals and other recovery plays but much of the US stock market is growth and defensives so money would probably just rotate into those. Much of the recovery in stock prices was well before we even had a vaccine and even when it was obvious that we would be in for a rough winter.

[randomep]

I agree with guys like Grantham that the Fed's/ECB's financial repression has created a dangerous mispriced market, but I am not one for kvetching, I rather prefer action plans, and very few of these market kvetchers seems to have on offer something sensible to me (Baupost has access to opportunities that I cant access). my current plan is to have a sizable cash allocation, a less sizable US based equity allocation that is mostly index funds, and an even less sizable US based allocation to an event driven special situation. not interested in EM which is certainly outside my constrained circle of relative competence.

 

if only one of these kvetchers simply said, match the market and you will do better than most folks, likely including the kvetcher community, then I would respect them more.

 

true family based anecdote: there was a distant relative, a very successful doctor who didnt know financial markets, who in the 1960-70s asked another older distant family relative, a very successful businessman, what he should invest in, provided it offered safety and a satisfactory return. the businessman said long term govt bonds would suit your requirements.  so the doctor bought a bunch of long term T bonds and forgot about them. come the late 1970s-80s and exploding interest rates, the doctor's bonds were hammered, and his only consolation was that he had outlived the businessman. heard him tell me this story over a brunch...that I paid for.

 

kvetching is easy, giving good advice is hard.

 

hah! thanks for sharing such an interesting story, anyway, about Grantham, I fully respect him as a wise voice of sanity in a world gone mad, however, I would not take stock picking advice from him, same for Shiller.  Grantham you have to remember manages a huge amount of money for a long time, so whatever actionable advice he gives should have borne out by now, last time I checked he returns are really poor, like in the 5-8% range.

 

[thowed]

about Grantham, I fully respect him as a wise voice of sanity in a world gone mad, however, I would not take stock picking advice from him

 

Thank you for elegantly summarising how I feel about Grantham et al.

 

It was a great step forward for my investing when I realised that the best letter writers are not always the best investors.