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Jeremy Grantham's Quarterly letter is out


gaf63
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In case some cannot access the link, I have attached the PDF.

 

Interesting to note the following quotes from Jeremy:

 

1. "At the end of July, we remained a little underweight equities despite this decent 7% real return forecast because we allowed ourselves a very small adjustment for a fundamentally scary outlook: thus we were two points underweight in equities instead of, perhaps, two points overweight. No regrets here either, for despite the strong rally in October, things are really, really scary. Aren't they? (And, more recently, stock markets are once again in disarray.)"

 

2. Third recommendation: "Don't be too proud (or short-term greedy) to have substantial cash reserves."

 

.....

 

Interesting....seems as though those who "swing a big line" in the market are in fact scared of the current environment, and are frowning upon the idea of taking an above-average optimistic view of the world here.

 

....

 

Jeremy's Exhibit 1 chart on page 3 is rather exciting to me. If we could in fact get down to an 800 level and stay there for an extended period of time, the number of bargains and the amount of time available to accumulate would be unbelievable!!!  8)

 

Let's only hope that the awe-inspiring, ever-present Government Put will one day be lifted!

Grantham_Q311_Letter.pdf

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Also interesting, from a purely behavorial standpoint, Grantham thinks PE ratios should be about 20% higher due to where profit margins and inflation expectations currently stand. Again, purely from a perspective of how investors treat current profit margins and inflation expectation levels and NOT from a long-run valuation perspective, which is what his 975 to 1000 fair value is based upon.

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Grantham's view: 1) the S&P is over-valued never getting much below fair value in 2009/2010 and 2) although the probability of bad outcomes is lower today than the near certainty they were in 2008, the damage if they occur could be far greater and longer lasting.

 

1) "The probabilities of bad outcomes are not as high for us today as they were in early 2008 when, I’m pleased to say, as predictors, they looked nearly certain to us.  But the possibility of extremely bad and long-lasting problems looks as bad to me now as it ever has."

 

2) Profi t margins dominate the P/E equation above, so that the market is unlikely to come down even to fair value,

about 975-1000 on the S&P in our view, and stay there until profi t margins decline.  And the longer you look

at these record and still-rising margins and compare them to the miserable unemployment and substantial spare

capacity, the stranger these high margins look.  They will come down to more normal levels eventually, of course,

and when they do they will bring the market down with them.  Probably by then, some of the negatives mentioned

above will have resolved themselves.  If not, then the market could decline a lot ...

 

Go figure. Stocks look cheap based on medium P/Es with bond yields south of 3%, however those Es are based on unsustainable profit margins which will come down at some point. Conclusion: stocks in general aren't cheap, however large cap high quality still is.

 

Action: Go long large cap high quality (focus on those whose earnings are less cyclical and that have the strongest competitive advantages, and hedge against macro market risks. Its pretty straight-forward. If that's too complicated by Berkshire with the built-in put.

 

 

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