about 3 years ago • 8 mins
On today’s episode of Insights, we’re pleased to present the second part of our interview with investing legend Jeremy Grantham, the co-founder and chief investment strategist at Boston-based asset management firm GMO.
In part one, Jeremy explained his growing fears that the stock market is heading for an imminent crash, fueled by risky behavior among small retail investors. For part two we wanted to explore Jeremy’s stock-picking strategy, what he thinks of bitcoin, and how small investors can help tackle climate change.
He started by explaining what he learned from winning big in the late-’60s stock market bubble – before having that bubble pop from under him – when it comes to picking the best value investments. For Jeremy it’s more than just looking at a stock’s P/E ratio – the ratio of a stock price to the company’s earnings – or price-to-book ratio – the ratio of a stock price to the value of the company’s assets…
Here’s a transcript of the interview. Hit 🎧 in the app to listen.
Jeremy Grantham: I developed a specialty for cheap stocks – but not not necessarily low P/E or price-to-book – but real bargains. And a bargain for what you are: if you have growth you're worth more, if you have high quality you're worth more, if you have a high return you're worth more, etc. But everything has a price. So we worked out a nice dividend discount model that looked at the future stream of dividends and discounted it back at an appropriate rate depending on whether you were high quality or low quality. And if you were a bargain, we could buy Microsoft – and we did. So we became a specialist in what I call broad-based intrinsic value. And I think that's the way to do it. I thought it then, and I think it now. None of this price-to-book – price-to-book is just the market's way of saying what the most pathetic book assets are out in the marketplace. And P/E is the equivalent of the market saying these are the earnings we trust less and won't grow. And the highest dividends are the ones most likely to be cut. So there's no reason why that should be a definition of value. It's a definition of dislike by the market players is a better description. But a decent dividend discount model, that's true value. In my professional investment career – we started working on this in about 1973 – and since then that's been my definition of value. And I haven't picked stocks for 15 years, but I would still recommend that approach. And that leads you to interesting conclusions, like you know, what is the future stream of bitcoin, of its dividends? You know, that's pretty easy: it's never going to pay you a dividend. You can wait forever, you will never receive a dividend from bitcoin. So therefore, by definition, in a hunker-down sense, bitcoin is worth nothing. And, as a last desperate resource, at least you can use gold to make jewellery but what can you do with bitcoin? You can't eat it. You can't do anything with it. So, rather like a painting, it's worth exactly what someone decides that it's going to be worth in the future. And the greater fool theory is, of course, you're going to find someone even more optimistic in the future. And as long as that works, it's like a chain letter. It works until it doesn't work – until the confidence in the chain breaks. And then people fall back on ugly, other things like dividend yield: nil. Or asset value: nil. Intrinsic asset value that you could go out and sell: nothing. And at that stage, bitcoin can easily sell for its intrinsic value, which is nil.
Andrew Rummer: So is this recent frothiness in the Bitcoin market something that concerns you?
Jeremy: Oh, of course, it concerns me because it's just a licence to lose money. But it's also something more interesting than that. Because it's kind of a leader. When the leaders go down, they all often go down first. So they're, you know, flagships you can keep your eye on them.
Andrew: What about those who point to the huge support from central banks like the Federal Reserve (Fed) – and from increased government stimulus spending – as reasons why the stock market has further to run yet?
Jeremy: Do not think the Fed is going to protect you, it will protect you just as much as Greenspan protected the Nasdaq and Bernanke protected the housing market in 2009/10/11. Which is to say: not at all. It is not in their power, in the end, to protect you. A bubble breaks when competence has finally been stretched too thin. So they are encouraging you to borrow at one hand, and they are creating a yardstick that is horribly unsustainable. Of course, you can't be giving money away like this indefinitely. The debt levels of all governments around the world are rising rapidly and one day they have to be paid back. And since you can't pay them back in a hurry, you're going to have to pay them back at higher interest rates as the rates roll over. So yes, it looks like at these low rates the government can easily afford the debt – but it can't afford to pay them back. And as time passes, the rates will rise and they will be lumbered with this huge debt, multiple of GDP. Rates rise, and they rise, and they still can't pay them back. They're locked into an interest rate schedule from hell. And that will happen and it will create a government spending crisis. And it will probably cause them to adopt the only possible survival strategy, which is to have inflation. And so we're pretty well bound to have inflation. I don't mean in the next six months, but in the next chunk of time – over the next 10 years. The only way out of this trap will be to inflate our way out and make the value of all this debt we've accumulated become much less because we certainly – as a country, as a government – we can't afford to pay a high interest rate on this massive amount of debt
Andrew: So I just want to change the topic slightly because one of your other major areas of interest is the fight against climate change. And I think that's gonna be a lot of interest to our listeners. So how can Finimizers use their relatively modest clout to tackle global warming in the most effective way?
Jeremy: You have to vote for Greens, you have to lobby for a greener existence, you have to join green organisations. And if you want to make money, you have to buy a green portfolio. That's one of the very few “have your cake and eat it” situations I've ever come across. I believe green VC will be – over 10 years – one of the best streams of venture capital, and I believe that venture capital will be absolutely the most promising stream of US investments. And so here we have 80% of our money looking to kick ass – and at the same time there is no better way of driving the cause forward. I think a good green investment in technology on the margin is better than a grant. In other words, we give $40 million a year to the most leveraged grant making we can possibly do. A lot of it is communications or propaganda – to get the real word out to politicians and the public and the voting public. But I think a good green investment in something that will be a better battery is actually more effective than a grant. And can you imagine those investments: you do 100 of them, some of them – a lot of them – fail. But some of them make a huge return. On average, you beat the pants off of equities. And the money comes back with interest to be redeployed. And it comes back a second time to be redeployed, ad infinitum. How are you supposed to make a grant that will be that effective? So we're trying to persuade all the philanthropists and well intentioned rich individuals that green investing is a wonderful combination of philanthropy, doing the right thing, and making money at the same time. We are going to have a green future and we're going to have to be all in and I describe it as the race of our lives: between wonderful technology and entrepreneurship on one hand, and terrible behavior, slow moving, vested interest, and starting from a terrible base. So we have to run as if our lives depended on it – and my life doesn't but your lives may and certainly your children, they really need all the help we can produce. This is not trivial. It isn't even philanthropy. I consider it purely defensive spending. Isn't it crazy not to protect your own society and your own grandchildren?
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