INVESTMENT The perma-bear who sees the ice melting
Jonathan Davis hears the trenchantly pessimistic views of Yorkshire-born US investment guru Jeremy Grantham Ive're barely ten seconds into our interview when Jeremy Grantham, onetime bedpan salesman from Doncaster, now hugely successful US money manager, is off on a favourite tack — mixing it with his competitors in the investment world. In this case what has drawn his ire are some reported comments from a well-known American fund manager whose views I have alluded to in a recent newspaper column.
'I'm going to start with an ad hominem remark,' he announces down the line from Boston, his adopted home, where he has built from scratch a global fund management business that looks after more than $140 billion of other people's money. The pundit in question, he says, 'is the biggest historical revisionist around. Everything he said he has predicted is plain wrong.... Every one of his arguments is flat-out wrong.' Then we're off on a five-minute discourse on the inadequacies of the said pundit, whose byline has adorned a hundred columns in Forbes magazine. After cataloguing a string of alleged misreasonings, Grantham concludes: 'I've told you everything already about the kind of guy I am. I'm a vindictive son of a bitch who never forgets.'
Grantham left these shores more than 40 years ago to do an MBA at Harvard and never found time to return. 'By background I'm both a Quaker and a Yorkshireman, which I like to call double jeopardy.' He means that the spirit of 'waste not, want not' and calling a spade a spade is ever present in his life. 'I cannot even pay for dinner myself. My wife has to pay the check.' The hardest thing he has ever had to do, he goes on, is to tell his English stepfather that he was not going to carry on flogging bedpans for the latter's modest hospital supply business, but plough his own path instead. After Harvard Business School, where he learnt how to speak confidently in public but nothing about the stock market, he migrated to Wall Street — where he was soon wiped out financially by a speculative stock that nosedived, taking his savings with it. The experience of the 1960s stock-market bubble stayed with him and shaped his investing philosophy.
If Grantham comes over as an embattled loner — a Geoffrey Boycott of the investment world — that is happily not the case. His quarterly letters to investors are treasured by devotees as much for their edgy wit as for their insights into future market performance. And you clearly cannot build a business as successful as GMO, his Bostonbased firm, without the ability to inspire those around you. According to Barton Biggs, former head of Morgan Stanley's asset-management business in New York, Grantham is 'a seeker of truth. He doesn't care what the world thinks He has a hard glitter to him, if you know what I mean.'
Although well into his sixties, Grantham is as committed and trenchant in his views today as he has ever been. Until a few years ago, when injury stopped him, he was still playing soccer in a tough pickup game in Boston. He now has two big passions, the state of the financial markets and climate change — and on both scores he finds himself in Cassandra mode, at loggerheads with mainstream US opinion.
One of Grantham's claims to fame is that he, as much as anyone, proved the case for timber as an asset class for mainstream investors, and this led him to take a deep interest in climate change. When I innocently inquire whether he has strong views on the subject, he replies, `Goddam right I do. It's going to be the biggest investment issue of the next 20 to 30 years. We're going to get bored to death with it.'
The polar ice, he says, 'is melting much faster than even the pessimists feared ten years ago. It's a great threat to food production and food prices, and perhaps to health as well.' Australia, he adds, has refused to sign the Kyoto agreement but is among the worst afflicted countries. Drought-ridden and parched, the country is a potential 'basket case'. And there's a bug in Alaska that used to breed once a year and now breeds twice a year. 'Over the last five years, it's killed all the trees for hundreds of miles, as far as you can see. You can multiply that many times over — probably more hurricanes, certainly more floods.'
As for financial markets, for many years Grantham has been dubbed a `perma-bear' for his tendency to say negative things that others in the business find inconvenient. On Wall Street, as in the City, by and large, next year in the markets is always a good year in the making: that's what the punters like to believe, and what investment firms like them to hear. As a contraria by nature and professional inclination, Grantham takes pleasure in telling it differently — but insists that he can be wildly bullish at times. He was bullish throughout the 1980s bull market in shares, and raved about real estate and emerging markets in 2002. His biggest mistake was to call the end of the greatest bull market of all time in shares two years before the peak in 2000.
At the moment he is very bearish, primarily about the stock market but also, unusually, about most other types of investment asset. Even his beloved timber (now yielding just 5 per cent) is no longer the bargain it once was. 'The stock market is overpriced. Everything is overpriced. Junk is king.' What he means is that, buoyed by cheap money, few if any financial assets now offer sufficient reward to justify investors' risk. So where then? 'For the moment I say don't be too proud to own cash. You always feel there must be something you can own that will do better [than cash] and usually there is. In 15 years of asset allocation for clients, we have never once owned cash. We could always find something better — but now we can't.' Equities as a class, he predicts, will deliver below-average (and in the case of lower quality stocks, negative) returns over the next seven years.
The cautious investor, he argues, should therefore prepare for trouble. The stock market may still go up this year on a wave of momentum, but investors should be tilting their portfolios towards less risky assets. In the pension fund he manages for his sister, that means conservative hedge funds, cash and high-quality stocks; plus some emerging market equities. With their high growth and low multiples, the latter are the only equities other than blue chips that still offer some risk-adjusted reward today. 'Net, they will do very well if the market stays intact; after getting really whacked in some sort of crisis, they'll probably rebound and do less badly than other overpriced segments of the equity markets.' That there will be some sort of market crisis, however, he does not doubt — any more than that climate change is a reality that is getting away from the human race.
Jonathan Davis edits Independent Investor.
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