about 3 years ago • 12 mins
On today’s episode of Insights, we speak to Jeremy Grantham, the co-founder and chief investment strategist at Boston-based asset management firm GMO.
Jeremy is hugely respected within the investing world. He’s in his early 80s and has lived the ups and downs of investing in real time. As he explains, he’s gone all-in on some risky, high-growth companies in the past and made paper millions – before seeing it all crash again.
His experiences have encouraged him to study the market bubbles of the past, all the way back to the Wall Street Crash of 1929 and even the tulip mania and the South Sea Bubble of the 17th and 18th centuries.
He’s got a reputation as a cautious, value-driven investor. But he’s not averse to high-tech companies with the potential for massive growth – and was a large early investor in QuantumScape, a company developing the next generation of electric batteries that received a lot of buzz last year when it agreed to be bought by a special purpose acquisition company (SPAC) and list on the stock market.
Back on Jan. 5th he published a blog post called “Waiting for the Last dance” that got a lot of attention because he warned that the US stock market is entering full-on bubble territory and is overdue for a sharp pull-back. So I was very pleased when he agreed to join us and discuss some of the points he raised in more detail. In fact, Jeremy had so many interesting things to say that we’ve decided to split this edition of Insights into two parts.
Jeremy started by explaining how he made a fortune in the so-called Nifty 50 bubble of the late ‘60s, before losing most of it again.
Here’s a transcript of the interview. Hit 🎧 in the app to listen.
Jeremy Grantham: We had our own little hairy bubble in 1968/69. And I was a young crazy at the time, and I participated fully. And the over-the-counter, the tiny penny stocks were flying. And if you didn't double your stock in three months, you were a slowpoke. And my favourite story is: we used to gather for lunch, my classmate from Fidelity and the one from Putnam – and I was at another group then, called Keystone – we'd all exchange notes and recommend our favourite crazy little stock. And in 1968, the crazy stock was American Raceways, which was going to introduce Formula One Grand Prix racing into America, you know, noise, blood power, death – what could be more American? But somehow it was European and not American. So we were going to change that. And I put a third of my money at $7 a share, and went off on my three-week vacation to England and Germany. (My wife's German). And then when I came back, it was $21, which was typical. So I did what any good value manager would do, I sold everything else I had, and doubled up. So now, you know, I had my entire net worth in American Raceways. And it started to go up and, and the game was, would it be $100 by Christmas? And it was $100 by Christmas. And I was rich by the standards I had been used to. I was only two years out of business school and now I had enough to buy, you know, a fancy house without a mortgage and a BMW – but I didn't. My bid was turned down. And so I waited a few more months in the market. And in 1969, all of those crazy stocks crashed and everything that we had disappeared in a cloud of smoke. So that was a lovely introduction. And after that, I knew all about bubbles and all about crazy investing and being optimistic.
Andrew Rummer: Given that history, what signs are you seeing that the stock market is once again in bubble territory?
Jeremy: Well, one of the ways you can spot a bubble is not by value: they're always expensive. You have to spot it by crazy behaviour. You look for the craziest behaviour of all time, and that that's going to be the top. And then the next day, the behaviour is still pretty crazy. And people believe the bubble, but a handful of people have started to take profits. And it's game over. The chain letter's beginning to break down. And the lead indicator would be something like bitcoin or something like QuantumScape. I am the proud owner of QuantumScape, it's slightly the biggest investment I've ever made in my life. We made it seven years ago, because we're green. We have a foundation for the protection of the environment. And a solid-state lithium-ion battery that's half the weight, twice the power-to-weight ratio, and charges in 10 minutes, and doesn't burst into flames is going to make the gasoline engine a historical fossil. And so it's a brilliant idea. And that's why we did it. And then I hate SPACs and I've been saying for some time that they should be outlawed. And then one day I wake up and find that my brilliant, well managed, promising enterprise has done a SPAC on me. So there I am. The SPACs are one of the also one of the things at the heart of this of this bubble. So keep an eye on SPACs and the SPAK index – which is all capitals, S-P-A-K – and wait for that to start dropping, you know, 15% in a day, and then you know to abandon ship as fast as you can. Anyway, so there I am in a SPAC, and it starts at $10, as they all do, and within three months it's gone to $130 and it's 30% of our foundation, our public trust, and my net worth all added together. And, you know, I paid $2.50 so you can imagine – on my biggest investment ever. So you multiply that by many times, 50 times. And that's an enormous amount of money. It was actually – just to titillate you – $630 million for a day. And then a month ago it started to decline. And it's come down from $132 to $48 in a month – and there's no news, it's just the same promising company. The problem is, it's going to take it for years to crank out batteries. They're brilliant batteries, and the market will be unbelievable. The battery market, Bloomberg says, will be 16 times bigger in 10 years. Trust me, 10 years passes very fast. And 16 times will make it one of the biggest growth rate markets in the history of man, because this is already a multi-billion market that you're multiplying 16 times and every decent country will have a gigafactory or two – it’ll be just an amazing opportunity for everybody. There'll be plenty of different technologies and plenty of different companies. However, four years is a long time to wait. And this thing at its peak, with four years to wait before it has any sales – forget profits – was selling for more than General Motors or Panasonic. Now there is nothing like that in 1929. There is nothing like that in 2000. And it's on the handful of those giant companies – and Nikola would be another example – the size of those things: they're multi billion dollars, 10s of billions of dollars. That makes this one more impressive than 2000. There's a big argument, the only argument in the bubble expert business is that – we get on the telephone and shout at each other – that this isn't as big as 2000. Yes, it is. No, it isn't. Yes, it is. That's the only argument. Is this the biggest bubble in American history? Or is it the co-equal? Or is it slightly less than 2000? That's the only argument, just so you know. And all of the professionals telling you not to worry, or doing it because it's simply no alternative for them. It's good for business to be always bullish, and they always are bullish. So get that get that in your head, guys.
Andrew: So why don't you buy into this argument that as long as stocks are cheap compared to the bond market, then this rally can just keep going?
Jeremy: Well, that's great. The bond market is more ludicrously overpriced than anything except bitcoin. So, tell you what: how about saying, "the market is really cheap compared to bitcoin?" Does that make you feel good? You know, pick something ludicrously overvalued and say, "Oh, I am cheap. I am less expensive than that is, therefore I am cheap." I am less expensive than bitcoin. Yes, I grant you. How about I'm less expensive than the bond market, I'll grant you that too. The bond market is ludicrous.
Andrew: This is the heart of the investors’ dilemma at the moment. If you look at stock markets you see incredibly high valuations, then you look at the bond market, and – as you said – it's even more expensive. So what should investors do? Where on Earth do they put their money?
Jeremy: Well, just as a thought experiment: you've got, say, three asset classes, one promises, to lose your shirt, one promises to lose half your shirt, and one promises to lose a quarter of your shirt. What are you supposed to do? I think Warren Buffett would say, you know, wait for the fat pitch – you don't have to swing. Don't invest. Keep your money back, bury it in the ground, I don't care – just just keep it there. But the idea that you would invest your money in something that's going to lose you a quarter of your shirt, because it's not your whole shirt is a pretty sad one. And that is the main argument of the bulls. Just take it apart, shake it a bit, and that's the argument: that this is going to be less overpriced than that. And therefore buy me. It's a crummy argument at the best of times, and it certainly is today.
Andrew: When I look around at markets at the moment I also see all sorts of warning lights flashing. But there's one indicator of a late-stage bubble that seems to be missing to me: full-on, full-throated investor bullishness, at least among professional investors. If you look at the AAII bull-bear spread, for example – a survey tracking the number of bullish professional investors minus the number of bearish ones – it's actually not a million miles off neutral.
Jeremy: The eye of the hurricane here is not in the institutional world for once, but in the individual world. You want to look at the percentage of market trading that has moved to individuals: from 10% to 30%, or something like that – that's really changed. The other wonderful little indicator would be the number of over-the-counter shares that are trading. I didn't write this up, because there are so many of these little things and they take up too much space, but in February last year, they did 80 billion shares over the counter. Some of these things are a tiny – fraction of a penny – some of them, you know, 15 cents. But they tend to be very cheap. And that 80 billion shares a month rose irregularly through the year. So by November, it was 380, which is not bad: four times. And then in December, it was 1.1 5 trillion. It tripled again. That way, from 80 billion to 1.1 trillion – and they're the real crazies, you know, they are tiny little stocks which have tripled and quadrupled. And no one even knows what they do. And mostly people aren't even interested in what they do. It's just what the stock market is telling you is moving in the last week. And you know, as I said, I've been there, done that. So it's not that I don't sympathise, but you have to recognise it for what it is. It's an interesting game. And it's a very exciting game. And I thoroughly enjoyed making a fortune in 18 months, and I was not as happy about losing it in six months – but that's the way it goes.
Andrew: Your audience is normally these big institutional investors that often have to put money into the market because that's the mandate that they have. In that piece from Jan. 5th – which was aimed at institutional investors – you were recommending they shift out of US stocks and high-growth stocks into emerging markets and value stocks. But from this conversation it sounds that you're saying that small investors who don’t have this obligation to invest in stocks – like the Finimize audience – should basically just hold on to cash for now. Have I read that correctly?
Jeremy: Institutions have to do what everyone else is doing. And they have very little leeway, penned in by career risk and business risk. Individuals, in comparison, it's paradise. You have an opportunity to save your money, you don't have to participate in the minus 50%-plus decline that follows every one of these great spectacular bubbles – without exception. There's never been this level of craziness without a 50% bust. And everybody knows that. But they can't tell you. So you're in a wonderful position to just sidestep it. But if you had to invest then you are lucky in that emerging market countries – China and India and the boys – are by no means as expensive. In fact, if you wanted to stretch it, you could say, on an absolute basis, they're not bad. They're not sensational, but they're reasonably priced – within noise level of what I'd call fair price – compared to the US in a great bubble, particularly the growth stocks.
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