On Grantham's Longest Quarterly Ever.

 
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.

If you have  patience, a decent pain threshold, an ability to be contrarian, basic mathematical skills and some common sense you can beat most professional managers.

Investment Outlook

-The majority of global equity markets are close to fair value – with only the S&P 500 being materially overpriced to deliver an expected real return of 1% over the next 7 years. The rest of the world's equities are slightly cheap to deliver an expected real return of 7% over the next 7 years.  Developed country debt markets (ex the European  PIGS) are very overpriced and investors in longer term bonds can be "murdered by inflation".

-The big risk factor out there is inflation – and equities are a dependable hedge against inflation over a several-year time horizon as the underlying companies have real assets.  In the short-term rising inflation can hurt stocks badly,  as it raises uncertainty levels, but earnings  catch-up fairly quickly and stocks normalise.

-Resources in the ground like oil , copper, forestry and farmland almost always provide a good hedge against inflation, and gold may as well.

-Resources  continue to be all great long-term investments, but possibly dangerous in the short-term as   commodities have attracted momentum players and speculators. The advisable strategy is to average-in rather than trying to predict its short-term moves.

-The European debt problem has no asset bubble at its centre (unlike the US housing bubble) but arises from a flaw in the original construct of the euro currency and has worsened due to the incompetence and delay on part of their political leaders.

-This makes the European problem  almost impossible to analyse within  an asset bubble framework , and the default assumption is to assume that it will muddle through okay.

Summary of recommendations:

-Heavily underweight non-quality US equities and maintain overweight in quality equities.
-Slightly overweight global equities as potential negatives are already priced in.
-Longer maturity developed market bonds  (especially sovereign) are  dangerously over-priced, as engineered  by the Fed.
-Resources in the ground, forestry and agricultural land are attractive and should be averaged-in.

"Value is a very mild but very determined influence, it gets you there in the end but an break you and your clients' hearts along the way".

Grantham's quarterlies are usually  replete  with brilliant insights and helpful investment tips- but his 10 lessons on investment are the best I have  come across in the context of an investor (rather than a trader). His point about the main advantage of an individual investor (over a professional money manager)  being that of patience and the ability to be contrarian is so true but also something which is too often squandered by panic driven buying (or selling) and following the herd.  Following one's investment methodology (i.e. diversity, no leverage) in a disciplined manner, going against the crowd (with a calculator in hand!), and being patient is very likely to pay dividends over the long run – remember "stocks usually recover, and markets always do" and the key is to survive until that happens!    Good luck!

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