Value Investor Jeremy Grantham Says Slowly Beginning to Invest in Market

Legendary value investor Jeremy Grantham called the real estate and housing bubble and went into cash in the summer of 2008. He is now slowly dipping his toes back into the market despite still believing the market will drop further.

The video is quite interesting and there were several points worth highlighting:

• Grantham, who has studied bubbles for some time believes that this is the first global bubble in history and also the first time a global bubble has popped at the same time.
• What started as a liquidity crisis has become a solvency crisis as firms write down vast amounts of assets.
• Grantham doesn't understand how other investors and the Fed missed the housing bubble. If you watch the video check out the chart with the Himalaya like growth over the last five years.
• The tension he faces as a value investor is between getting in too early and getting in too latel For now, he advises being 20% in stocks, mostly in blue chips and emerging markets. He believes this ratio provides some upside while still protecting capital from considerable downside risk.
• Grantham predicts that blue chip equities will return about 10.5% over the next seven years. That's not that high. At this point I would rather invest in Municipal bonds paying 6% tax free. I think investors will need a higher long-term return before jumping into the market.

If you're interested in reading more of his thinking, check out his quarterly newsletter (PDF). There are some good nuggets in there, including this thoughtful observation on why most of the investment bank CEOs missed the bubble:

"My second theory would be even harder to prove, and this is it: that CEOs are picked for their left-brain skills – focus, hard work, decisiveness, persuasiveness, political skills, and, if you are lucky, analytical skills and charisma. The “Great American Executives” are not picked for patience. Indeed, if they could even spell the word they would be fired. They are not paid to put their feet up or waste time thinking about history and the long-term future; they are paid to be decisive and to act now.

The type of people who saw these problems unfolding, on the other hand, had much less career risk or none at all. We know literally dozens of these people. In fact, almost all the people who have good historical data and are thoughtful were giving us good advice, often for years before the troubles arrived. They all have the patience of Job. They are also all right-brained: more intuitive, more

given to developing odd theories, wallowing in historical data, and taking their time. They are almost universally interested – even obsessed – with outlier events, and unique, new, and different combinations of factors. These ruminations take up a good chunk of their time. Do such thoughts take more than a few seconds of time for the great CEOs who, to the man, missed everything that was new and different? Unfortunately for all of us, it was the new and different this time that just happened to be vital. It is therefore ironic that we fire these top CEOs when the trouble hits. The headline should read: “Come back, leaders of Merrill, Citi, Bear, and Lehman. All is forgiven (for a while).” The typical CEO is precisely equipped to deal with emergencies and digging out. Thus, Paulson was just the man to miss the point, but equally just the man – or at least a typically good one – to deal with a complicated crisis under stress."

Here's the video: