“The Longest Quarterly Letter Ever” is the aptly titled February release from delightfully pessimistic Jeremy Grantham, (below right) co-founder and chief investment strategist of Grantham Mayo Van Otterloo, a Boston-based asset management firm.
Weighing in at 14 pages (15 with appendices that list “Hamlet, Act I, Scene III,” among others) the three-part newsletter includes sub-heads like “Investment Advice from Your Uncle Polonius” and “Your Grandchildren Have No Value (And Other Deficiencies of Capitalism),” before thankfully wrapping up with a market review.
For individual investors setting out on what he sees as “dangerous investment voyages,” Grantham offers 10 points of advice (in just the first section). They are:
- Believe in history. “All bubbles break, all investment frenzies pass away,” Grantham writes. “The market is gloriously inefficient and wanders far from fair price but eventually, after breaking your heart and your patience (and, for professionals, those of their clients too), it will go back to fair value. Your task is to survive until that happens.”
- “Neither a lender nor a borrower be.” If you borrow to invest, it will interfere with your survivability, Grantham notes, before adding “Unleveraged portfolios cannot be stopped out, leveraged portfolios can.”
- Don’t put all of your treasure in one boat. “This is about as obvious as any investment advice could be,” he lectures.
- Be patient and focus on the long term. “Wait for the good cards,” Grantham writes. “If you’ve waited and waited some more until finally a very cheap market appears, this will be your margin of safety.”
- Recognize your advantages over the professionals. He believes this is by far the biggest problem for professionals in investing is dealing with career and business risk: protecting their own job as an agent.
- Try to contain natural optimism. From someone like Grantham, it’s a no-brainer.
- But on rare occasions, try hard to be brave. “You can make bigger bets than professionals can when extreme opportunities present themselves because, for them, the biggest risk that comes from temporary setbacks–extreme loss of clients and business–does not exist for you,” he advises.
- Resist the crowd: cherish numbers only. Hard advice to follow, as “keeping up with the Joneses” and the enthusiasm of a crowd is hard to resist.
- In the end it’s quite simple. Grantham offer up encouraging data (no, really): “GMO predicts asset class returns in a simple and apparently robust way: we assume profit margins and price earnings ratios will move back to long-term average in seven years from whatever level they are today.”
- “This above all: To thine own self be true.” To be at all effective investing as an individual, Grantham concludes, you must know your limitations as well as your strengths and weaknesses.
“Doomsayer” Grantham then begins a lengthy diatribe against what he sees as the deficiencies of capitalism, specifically taking on the Supreme Court’s recent Citizens United ruling.