Advice from a bear: panic
Jeremy Grantham, Boston's most famous investing bear, exudes a kind of reassuring calm when he tells you that he has seen the stock market's future, and it's a train wreck.
Grantham, the chairman of Grantham, Mayo, Van Otterloo, warned institutional clients in the late 1990s that the stock market was headed for a dangerous fall. He was early, which cost his firm big business, but ultimately right. His current warning is a different kind of bitter pill.
''We're faced with the most broadly overpriced asset class mix of my career, 35 years, and if I had a 50-year career, I think it would still apply," Grantham says from his firm's offices overlooking Boston Harbor from Rowes Wharf.
Grantham saw the market top of 2000 as perilous because investors could lose huge sums of money betting on growth stocks, but there were plenty of other types of assets that traded at bargain prices. Today, he believes the potential fall is not so steep, but there is hardly anyplace to hide.
The hiding holes of 2000: bonds, real estate investment trusts, and value stocks. Try to find similar opportunities today.
In its most recent quarterly letter to clients, Grantham's firm outlined a strategy for superior relative performance, faring better than the rest of the pack or an index. But what if the objective was actually to make money? ''Our summary advice on an absolute basis is much more painful to deliver though shorter: PANIC," the letter said. ''Now is the time to lower risk and survive to fight another day with your assets as intact as you can manage."
Where to go? Grantham suggests emerging-market stocks and timber for institutional clients. He tells them to hold bonds with shorter durations and conservative stocks with a tilt away from US securities.
If you were to imagine such a discouraging investment outlook to be a heavy burden on the messenger, Grantham would surprise you. At 66, he is an energetic bear armed with computers chock-full of historical data supporting his case. For much of the past five years, Grantham has been glad to stand as the investment world's combative bookend to Jeremy Siegel, the bullish Wharton professor and author, among others.
Grantham has a long and impressive investing record in Boston. He cofounded Batterymarch Financial Management before creating his current firm with Richard Mayo and Eyk Van Otterloo 26 years ago. Its performance among its 53 separate investing strategies consistently beat benchmarks, but international investing has produced its strongest results.
The firm paid a price for its dire stock-market warnings and conservative asset allocation beginning at the end of 1997. ''We never lost any business for 18 years, and then we lost 45 percent of our book of business in 2 years," Grantham says. The firm shrank to about $20 billion dollars in assets under management by early 2000, losing big in one of history's great bull markets, but has since climbed back to manage $70 billion.
But the comeback has been built on a similarly gloomy message. Grantham says the Standard & Poor's 500 stock index should logically bottom out at 725, from its current level of 1,183, though he won't venture a guess about when.
He says the consensus view that stocks are fairly valued today is wrong, built on overly optimistic expectations for corporate profits. If profit forecasts are too high, so are today's stock prices, Grantham says. He has scads of data on the market's long-term trends to back him up.
Grantham has been right before, but he's also been wrong on other market calls. And getting it right at the wrong time can be expensive, too. Many of Boston's best money managers disagree with Grantham's warnings today, but they take the messenger very seriously.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
