My boss told me to serve expensive wine because the more the financial experts I was hosting drank, the more they were likely to speak candidly. So I pulled out the corporate card, ordered grand cru Chablis, and told the waiter to pour liberally. As it turned out, Jeremy Grantham did not need alcohol to loosen his tongue. Before the fish was even served, Grantham had compared a popular investment theory to a vampire that won't die, implied that a fellow diner's gains were the product of luck, not skill, and made seemingly outlandish statements about the stock market. With his clipped English accent he sounded like a scolding professor.
This was November 2002, the aftermath of the tech bubble. I'd gathered a few of Wall Street’s leading lights at New York’s “21” to address a pressing question: Was the bear market finally over? Most strategists were cautiously optimistic, predicting the S&P 500 index would end 2003 north of 1,000. If anything, they were overly cautious. When the ball dropped in Times Square 12 months later, the index was at 1,111.
Grantham, co-founder of Boston money manager Grantham, Mayo, Van Otterloo, had refused to offer a one-year prediction, declaring that short-term movements of the market are impossible to predict (he’s correct). But, he said, markets always revert to their long-term averages. By his calculations, that would take the S&P down to 670 in seven years.
It’s hard to overstate how insane that prediction sounded at the time. The stock market was slowly crawling its way back after getting cut in half, and this Brit in an Hermès tie wanted us to believe that in 2009 my 401(k) was going to be more than 20% lower? “At GMO, we hero-worship reversion to the mean,” he said, by way of explanation.
Nearly seven years later, on March 9, 2009, the S&P hit an intraday low of 666 and closed at 676. It was at that point I began to hero-worship Jeremy Grantham. His prediction was so uncannily accurate, it seemed more like a Vegas magician’s trick than a market forecast. And it wasn't a one-off. For the decade, he called for emerging markets to return 7.8% a year. They logged 8.1%. He said U.S. small-company stocks would return 2.5%; in fact, they returned 2.3%. You get the picture.
It’s important to understand that nobody else does this. Not Goldman Sachs, not Warren Buffett, not George Soros. Academics will tell you it’s not possible, and Wall Street doesn’t have the patience to look that far ahead anyway. Hell, most traders close out their positions before cocktail hour. In fact, in the late ’90s, Grantham paid dearly for being correct. He saw the Internet bubble inflating and kept GMO’s clients out of tech stocks. They were so pissed that they were missing out on all those hot IPOs (RIP pets.com) that they pulled 60% of their money out. They regretted the move.
On March 10, 2009, the day the market turned around, Grantham published a letter to investors under the headline “Reinvesting When Terrified,” announcing it was time to buy stocks. Four and a half years later, the market was up about 160%.
So, the obvious question: What is Grantham recommending today?