Next up at the Ira Sohn Investment Research Conference is Jeremy Grantham co-founder of GMO, the investment management firm, who said he long ago left investment research, finding it too dull, and “got into the bullshit business,” as he puts it.
He promised to be helpful, “but not too much, as some of you are competitors,” he quips.
He throws up a chart of seven-year returns on equities and bonds, with the highest projected return, 7.1%, for US high-quality stocks, and the lowest return, a decline of 0.6%, for US Treasuries of 30-day to 2-year vintages.
That leads Grantham to conclude that a good portfolio could include, in first place, commodities, especially timber — the most interesting asset class, and the only commodity that didn’t lose its value in the Great Depression and in the 1970s. Non-equity, non-bond investments, including commodities such as timber, should, in general, see a 6% seven-year return, so go look for a diversified timber portfolio, he advises.
Number two in a good portfolio are emerging markets equities, which will sell at a decent premium to all global equities. Third portfolio recommendation, all US high-quality equities.
Grantham’s next chart is the relative valuation of mega-cap equities relative to the Standard & Poor’s 500. The chart basically shows that the ratio’s gone down sharply since 1955. His conclusion: such mega-caps are a great value now, much cheaper than the S&P.
Other general points: the UK housing bubble has yet to burst, with prices having to collapse another 33%. That’s going to cause lots of pain, says Grantham.
Beware Year Three of a presidential cycle, says Grantham: that’s when extremely risky equities tend to soar, having an average total return of 30%. Look out short sellers, going into next year, says Grantham.
“And I hope that misleads you all a little bit,” Grantham concluded, to much laughter.
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