Jeremy Grantham – An Uncertain Crisis - [Invest Like the Best, EP.177]

**Patrick O'Shaughnessy** (0:04)
Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_3** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions and the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:49)
My guest today is Jeremy Grantham. Jeremy is the co-founder and chief investment strategist of Grantham, Mayo, & Van Otterloo, aka GMO. GMO, which manages more than $60 billion for clients, was a firm that helped educate me early in my investment career. They've long published thought-provoking research, most of which came from Grantham himself. He's regarded as a highly knowledgeable investor in various stock bond and commodity markets, but is particularly noted for his prediction of various bubbles. In this conversation, we discussed the current crisis, which he calls the fourth major event of his long and storied career as an investor. As he says, this one is the most uncertain.
We also discussed unique topics like commodity-based companies and how opportunity often lies between fields of expertise. Please enjoy our conversation.
Jeremy, thank you so much for doing this with me today. You've had such a long and interesting career in the field of investing that my opening question is a bit of a motivational one, which is what is the thing that for you is the compulsion or the deep curiosity that keeps you going in the field of investing specifically despite long and large success?

**Jeremy Grantham** (1:59)
That's a difficult question.
I like analytical problems, data. My idea of heaven, I know it's politically incorrect, is the coronavirus. It's flooding me with interesting, contradictory, questionable data. Some is high grade, some is low grade, some is peer reviewed, some is rumor. It involves every aspect of humanity and politics.
And yet, in a kind of grim sort of way, there is a scorecard on each country's response. That is the very essence of what has turned me on in life, is analysis and statistics under uncertainty, where humans intervene and the quality of the data is mixed.

**Patrick O'Shaughnessy** (2:53)
You've seen such a large transformation of both investing and capital markets over the years.
What, in your opinion, stands out the most from the perspective of someone trying to earn, we'll call it excess return versus a very bland, broad market benchmark? What today is more important in that pursuit than was a few decades ago?

**Jeremy Grantham** (3:18)
I think that there's always been two major approaches to managing money.
And one of them, which was effective in the 1920s, that is equally effective today, is at the individual stock level, in particular, to focus on unappreciated changes in the future. What is going to happen? And find out, deduce what the market thinks, and look for unappreciated changes, good and bad, and bet against the market. And bet that your analysis has picked things up that the marketplace has missed. So fundamental old-fashioned analysis is effective at any time. We were lucky when we came in, in that some parameters that somewhat reflected a value had worked pretty well as contrarian indicators for 80 years or so when we started 40, 50 years ago. And those were things like price to book, PGE, price to cash flow, price to sales.
What I have long thought of as dopey value. What they are really is just expressions of the markets discussed.
And the cheapest price to book are really the assets which dollar for dollar the market thinks are the least useful. And the lowest PGE are the earnings the market least believes will be sustainable and the highest yield the most likely to be cut or not sustained. There's no reason why those things should work and indeed for 20 years now they haven't been working. But in the old days they worked because the market loved comfort so much that it was constantly overpaying a little bit for the proctoring gambles and underpaying for those nasty cyclicals that kept getting excess production and getting crushed.
And we came in, my first firm, I started in 1969, and we applied those standard Graham and Dodd techniques, and they worked beautifully. Life was simple, didn't work every year, and you occasionally had a string, a painful string of two, three, or even four years where stocks would trash you and upset your clients, but they came back made up for the lost ground. So if they gave up 4.1 year, they would make it back and deliver the usual 4 points a year the following year. And so life was easy. And I think the general caliber of competition back in those days was very weak, and therefore, if you did decent analysis, looked for value, you could find it. So we were able to build simple mechanistic models, giving points for cheap book and so on, and have a win on a very broad basis, so we could manage a lot of money. And we were winning 2 out of 3 years and adding a few points on average a year. And that era, perhaps, started to end around 2000 Too many machines were picking it up, too many quants, too much money, and pretty soon the aversion to, the historical aversion to cheap stocks had disappeared because they acquired the reputation for having won. The quants made it clear. They understood that for 80, 100 years into the midst of time, these were factors that worked. And indeed academics wrote it up and got a lot of credit for such a simple-minded idea. Anyway, that was the past. And those early pickings have gone, leaving, as I said, old-fashioned, labor-intensive, stock-by-stock analysis, not only labor-intensive, but risk-intensive, because you have to bet that things will change and you have to bet that the market is wrong.