|  Jeremy Grantham co-founded Grantham, Mayo, Van Otterloo & Co. LLC (GMO) in 1977. GMO is an institutional investment management firm with over $20 billion under management. Jeremy Grantham serves as its chief investment strategist and oversees its quantitative products and investment strategies. The firm runs over 35 equity investment products both traditionally and quantitatively managed for the U.S. and foreign markets including emerging countries . Investment management -
Indexing is hard to beat, and relative passivity is not a vice. The investment management business creates no value, but it costs, in round numbers , 1% a year to play the game. In total, fund managers are the market and given the costs they collectively must underperform. The U.S. stock market is approximately efficient - 95% or more of all market moves are unknowable noise and perhaps 5% are manageable (or predictable). -
Historically, equity investors have over-paid for comfort and excitement. Paying up for comfort (stability, information, size , consensus, market domination, and brand names ) and excitement (growth, profitability, management skills, technological change, cyclicality, volatility, and most of all, acceleration in all these) as growth managers do for example, is not necessarily foolish, for their clients also like these characteristics. Conversely, when a value manager is very wrong - as he will be sooner or later - he will be fired more quickly than a growth manager. -
One of the keys to investment management is reducing risk by balancing Newton (momentum & growth) and regression (value). Bodies in motion tend to stay in motion (Newton's First Law). Earnings and stock prices with great yearly momentum tend to keep moving in the same direction for a while, perhaps because economic cycles are, on average, longer than a year. Be aware that everything concerning markets and economies regresses from extremes towards normal faster than people think (e.g., sales growth, profitability, management skill, investment styles, and good fortune ). -
Ability to handle illiquidity is a major advantage for long- term investors. Because everyone's time horizons are shorter than they should be, liquidity is overpriced. A long-term investor should always try to exploit the other guy's short-term horizon and be paid for taking illiquidity. -
Confidence factors are the primary influences on price levels in the U.S. market, not fundamental factors like growth and real interest rates. Confidence is primarily affected by inflation, volatility of the economy and corporate profit margins (not growth) and the importance and make-up of confidence has been remarkably stable for 100 years or more. Because rising margins drive confidence and p/e's up and sales growth does not, market cycles tend to double count: rising margins x higher p/e's followed by falling margins x lower p/e's. Therefore, the market deviates far more from economic trend than strictly financial logic would allow. Trading noise further adds to this non-economic volatility. -
The single most important advantage for traditional investors vs. quants is a tight focus. Quants will never win in U.S. Electric Utilities. For quants, the relative advantages are complexity and speed of price moves (however because quants can handle more variables they can't resist using them -they can easily end by throwing in the kitchen sink and drowning in detail and data mining). In addition, liquidity problems and risk control are also more easily addressed by quants. Quantitative models tend, like chess models, to get a little better every year. While traditional managers can only handle so much data. (But unlike chess models, quants do not have to beat Kasparov but only the average market player.) -
Asset allocators must be picked on faith. With a 60% hit rate it takes a good manager only 1.5 years to prove he can pick stocks because of many decisions a year, but 55 years to prove he can pick stocks vs. bonds ( assuming only one decision every 3 years). -
Investment managers are harder to pick than stocks. Clients have to choose between facts (past performance) and the conflicting marketing claims of several potential managers. As sensible businessmen, clients will usually feel they have to go with the past facts. They therefore rotate into previously strong styles which regress (since opportunities by style regress, past performance tends to be negatively correlated with future relative performance), dooming most active clients to failure. 90% of what passes for brilliance or incompetence in investing is the ebb and flow of investment style (growth, value, small, foreign). www.gmo.com 'Why look for the needle in the haystack? Owning the entire stock market is the ultimate diversifier. Buy the haystack!' ”John C. Bogle | |
