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Jeremy Grantham's 1st Qtr. letter is out


gaf63
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I lost a little more respect for Grantham after reading the last piece of this letter... entitled:

 

“Friends and Romans, I come to tease Graham and

Dodd, not to praise them.” (On the potential disadvantages

of Graham and Dodd-type investing.)

...

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I, on the other hand, thought it was an instant classic. He's basically not saying anything new or out of the ordinary, but it reads like pure gold. I'm talking about that second part, the Graham/Dodd thumb-down, and a Buffett's style endorsement at the same time. One of the best articles I've read in a while.

 

His high quality definition is three-part, consisting of high profitability, profit stability, and low debt. I'm really curious what the acceptable threshold of profit stability is, in his view.

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Guest dealraker

Lose all the respect you want with Jeremy Grantham.  Grantham has whipped Mr. Market's butt by more percentage points than Graham so he has a foundation to speak from.

 

My guess is, because I haven't read his newest writing yet, that he's not disrepectful of Graham at all. 

 

Making a point is probably the point of it all.

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Problems with two passages:

 

When you buy a stock, because it has surplus assets or a

good yield or a great safety margin, you are really making

a bet on regression to the mean. We are really counting

on the fact that current unpopularity will fade, that the

current problems in the industry will dissipate, and that

the fortunes of war will move back to normal. Well, as a

provable, statistical fact, industries are more dependably

mean-reverting than stocks, for individual stocks can

on rare occasion, permanently change their stripes à la

Apple. (Or is that à l’Apple?) Sectors, like small caps,

are more provably mean-reverting than industries. The

aggregate stock market of a country is more provably

mean-reverting when mispriced than sectors. And great

asset classes are provably more mean-reverting than a

single country. Asset classes are the most predictable of

all: when a bubble occurs in a major asset class, it is a

near certainty that it will go away.

 

To be more serious in my criticisms, a potential weakness

of the Graham and Dodd approach, as it is usually

practiced, is in its reliance on low price-to–book (P/B)

ratios as one of its cornerstones. Low P/B ratios are, after

all, the market’s way of saying “these are the assets in

which I have the least trust.” It should not be surprising,

therefore, that when you have a depression, or nearly have

one, that more of these “cheap” companies go bust than is

the case for the “expensive” Coca-Colas.

 

A, that's not why i buy a stock.  B, that statistical data is unfair.  Companies expected to go bust will go to low P/B's, first.

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I liked about 1/2 of what he had to say about value.  But there were a few stinkers in the other half.

 

The analysis of P/B quintiles & recovery time was wacky.  He assumed a growth rate going forward from the crash instead of actually looking at what happened.  I'll post a mini-article after I finish my taxes.  But here's a graph that refutes his notion that it took 41 years for high B/P to catch up to low B/P stocks (attached) ...

 

 

 

 

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Couple of notables:

 

(1) Time. If you can wait for 'mean reversion' (private $) you'll do well, but if 'marketing' is driving your portfolio you'll get fired (OPM). And it happens because the multiple paid is P/E*(1+g)^n where 'g' is the company specific or industry growth rate (perception of) & 'n' is the number of years. The equivalent OPM market segment is really venture capital.

 

(2) Volatility. If you can tolerate high volatility you'll do well (private $), otherwise you'll get fired (OPM). And the mitigants are your cash holding, the size of your weightings, the quality of your holdings, & the depth/quality/experience of your investment knowledge (ie: its no accident that the 'greats' are old).

 

Notable is that once you have (2), the private $ advantage is a lot more than generally recognized.

 

SD

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Guest Dazel

 

I love the arguments and discussion...that is the only way to learn. As Munger said about Buffett "He is great because he never stops learning"...when asked about Buffett's investment in BYD.

 

The biggest thing to understand about investing is that there is no silver bullet. I think that Graham gave us all (including Grantham) a foundation for value...Rememeber he did this during the depression! He showed us that it is the stomach that makes you money but with a value caveat. Grantham has proven to that he too has the stomach to believe in his value proposition. Grantham has used a similar approach to what many have failed at but because his fundation is value he has been proven right. Others hide behind equations (be very wary!!!) because it gives them strength of conviction. Having strenth of conviction when you do not have a value basis (liquidation price) will wipe you eventually because the equations are wrong over the long term. Reverting to the mean may have some basis but if it takes 10 years..who cares? Coke's high in 1998 was $65...it is $55 now...

 

The true investing machine Buffett has taken all of the data...Graham, Fisher, and yes I would bet money he looks at Grantham as well. He incorporates all of these principles into his own methodology and we have seen the results over time.

 

However, it is with out a doubt his iron stomach and willingness to buy when others are fearful..that has made him money time and again.

 

Funny, that the greatest line out of the great recession came from Buffett on CNBC which is watched by 100's of millions during the best buying opportunity of our lifetime...and no one listened (except Prem Watsa!)

 

I do what Ben Graham taught me..."I buy when others are fearful"...there was no mention of value or Graham Dodd.

 

I feel blessed to have seen the "greats" do their their thing (I include Grantham in there)...history books will be written about how they "acted" not what they said.

 

Dazel.

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