Jeremy Grantham has been one of the most prominent investors over the past 50 years. His investment philosophy can be summarized by his commonly used phrase “reversion to the mean.” Grantham’s view is that, over the long-term, assets trend toward a sensible equilibrium valuation on average. Short-term price distortions create trading opportunities for the long-term investor.

Grantham was one of the pioneers of index funds, which are a hallmark of a passive investing strategy. This approach is well-suited for investors wishing to ignore financial bubbles. However, shrewd investors with an eye for value can outperform index funds by actively managing portfolios.

Financial Bubbles and Reversion to the Mean

I would say that financial markets are very inefficient, and capable of extremes of being completely dysfunctional.

Bubbles have quite a few things in common, but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.

I believe the only things that really matter in investing are the bubbles and the busts

Remember that history always repeats itself. Every great bubble in history has broken. There are no exceptions.

These quotes epitomize Grantham’s approach to investing. What really matters is how asset classes perform over the long-term. Speculative bubbles are short-lived yet may provide some contrarian investing opportunities.

Financial and Economic Policy

I don’t mind the government accruing debts as long as every dollar is spent effectively with a high return. That works out fine. If you accumulate debts and waste your money, that’s, of course, a disaster.

Capitalism believes that its remit is exclusively to make maximum short-term profits.

Grantham is pessimistic about the civic role of finance. While smart policies have potential to do great things for society, realistically policymakers work to satisfy greed.

Value Investing

You don’t get rewarded for taking risk; you get rewarded for buying cheap assets. And if the assets you bought got pushed up in price simply because they were risky, then you are not going to be rewarded for taking a risk; you are going to be punished for it.

Although value is a weak force in any single year, it becomes a monster over several years. Like gravity, it slowly wears down the opposition.

Volatility is a symptom that people have no idea of the underlying value.

I hate gold. It does not pay a dividend, it has no value, and you can’t work out what it should or shouldn’t be worth,” he said. “It is the last refuge of the desperate.

Grantham is a quintessential value investor. He finds investment opportunities based on what an asset actually produces, rather than supply and demand forces in the market. Asset valuations are very effectively modeled based on the future cashflow they provide. Because gold produces no profit, its has no value as an investment.

 

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