For most of the past decade, Grantham has been skeptical of stock valuations and dismissive of the fervent enthusiasm that accompanied the bull market. After his latest crash call, one post on Twitter listed his sky-is-falling warnings to suggest he’s wrong too often to be taken seriously.
At GMO, which manages about $65 billion, value has been a costly strategy for clients. Only one of firm’s nine equity funds with a five-year track record has outperformed the MSCI World Index, according to Bloomberg data.
Since he first predicted a collapse in stocks a year ago, Grantham has been preparing for the worst. At the Grantham Foundation, which has venture-capital investments in everything from renewable energy to carbon capture, he shorted the Nasdaq Composite and Russell 2000 indexes as a hedge.
Personally, he invested in GMO’s so-called equity dislocation strategy, a vehicle that also uses shorts to profit from a narrowing valuation gap between cheap and expensive stocks.
Short positions aren’t usually part of Grantham’s script. He said he targeted the Russell 2000 because it has a “high density of flaky companies that aren’t making any money” and the Nasdaq because it too contains many unprofitable names.
Not selling is always an option, Grantham said. But, he pointed out, those who held through past crashes endured an agonizing wait to recoup their losses: 25 years in the case of the Dow Jones Industrial Average in 1929, almost 15 years for the Nasdaq Composite in 2000, and 5 1/2 years for the S&P 500 in 2007.
“If you think you can stand it for 10 or 20 or even 30 years, be my guest,” Grantham said. “But history says a lot of you will not stand it.”
This article was provided by Bloomberg News.