John Mauldin recently put out an article called “Pavlov’s Bulls, the Importance of Asset Class Bubbles for Value Investors and Why They Occur”, which pretty much summarizes popular misconceptions about financial bubbles. The article contains an essay and a speech by Jeremy Grantham of GMO who, according to John; “is one of the more brilliant and talented value managers”. I have no doubt he is, my beef is that in my opinion, much of what he says about bubbles is wrong.
Jeremy presents his credentials as an expert on bubbles, as follows:
In my 1Q 2009 Letter I wrote, “I am parting company with many of my bearish allies for a while … we could easily get a prodigious response to the greatest monetary and fiscal stimulus by far in U.S. history … we are likely to have a remarkable stock rally, far in excess of anything justified by either long-term or short-term economic fundamentals … [to] way beyond fair value [then 880] to the 1000-1100 level or so before the end of the year.”
Fair enough, that was a good call and Jeremy says that based on that analysis he shifted his weighting in equities from 38% in October 2008 to 62% in 2009; presumably that was in April or May since the “Letter” was 1Q 2009?
Nothing wrong with that, I imagine he must have recouped almost everything he lost on the 38%, and personally having read Jeremy’s essay I would have no hesitation in entrusting a proportion of my (very modest) wealth for him to manage.
Particularly since the person who used to do that tedious and often thankless task for me (my dad) sadly passed away in October 2008. Incidentally by June 2008 he was 0% equities and living in a lovely rented property (plus grounds – great croquet lawn); there again he did set up the Abu Dhabi Investment Authority so he ought to have known what he was doing.
Regardless, that call doesn’t mean Jeremy or in point of fact my dad, know (knew) any more about bubbles than Professor Nouriel Roubini knows about stock markets…he who called the rally from 675 to 1,300 (on the S&P 500) a “dead-cat-sucker-bounce”…about five times.
On the subject of credentials, this is what I said about the S&P 500:
February 2009:“The stock market turn will be when the Dow hits 6,600 and the…
