Jeremy Grantham’s (who runs the well-known money manager GMO) latest “longest quarterly ever” is a masterpiece and is divided into three sections, covering investment advice, deficiencies of capitalism and investment outlook.
10 lessons for Investing:
1. Believe in History: History repeats and ignore it at your peril – “all bubbles break and all investment frenzies pass away”. The market is inefficient, tends to move far away from fair value but eventually gets back to fair value – and the aim for investors is to survive until that happens.
2.Neither a lender or borrower be: Investing with borrowed money tests a critical asset of the investor-patience,as leveraged portfolios can get stopped out, and it encourages financial aggressiveness, recklessness and greed.
3. Don’t put all your treasure in one boat: A well diversified portfolio will give a portfolio resilience and the ability to withstand shocks thereby increasing the ability to ride out adverse market movements on big bets.
4. Be patient and focus on the long term: Wait for the “right pitch” when making investments and have the ability to withstand the pain when a good investment made becomes even cheaper. Individual stocks usually recover and broader markets always do – so by following the previous rules one can outlast the bad news.
5. Recognize your advantage over the professionals: Professional managers are subject to the dual curses of career risk (by bucking the trend) and a tendency to over-manage (to justify their job). Individual investors can be patient and not care about what others are doing.
6. Try to contain natural optimism: While optimism has probably been necessary for survival over the ages and successful people are generally optimistic – its downside for investing is the tendency to ignore the bad news.
7. But on rare occasions, try hard to be brave: Individual investors can be more aggressive than professionals when extreme situations present themselves, by being able to withstand temporary adverse market moves. When the numbers indicate a very cheap market go for it.
8. Resist the crowd: cherish the numbers only: This is the hardest advice to take as the enthusiasm of the crowd is hard to resist. Focus on the numbers and ignore all else and keep it simple – professionals will, on average, lose money trying to decipher the complexities.
9. In the end its quite simple. Really: GMO has had a successful track record on forecasting asset class returns over a 7-year period , one every quarter since 1994 by ignoring the crowd, working out simple ratios and being patient.
10. “This above all: to thine own self be true”: It is imperative that you know your limitations and your strengths and weaknesses – if you cannot resist temptation (of following the crowd) you must not manage your money – “there are no Investors Anonymous meetings”. In which case, either hire a manager who has the skills (which can be hard to do) or put your money in well diversified global portfolio of stock and bond indices.