- Jeremy Grantham, the cofounder and chief investment strategist at the $71 billion Grantham, Mayo, & van Otterloo, has become a world-renowned market voice by calling every modern financial bubble — including the past two stock meltdowns.
- In an exclusive interview with Business Insider, the industry legend reveals his big investment pick for the future and provides a detailed explanation.
Advertisem*nt
Don't sweat the small stuff. Stay focused on the big picture.
These are two commonly espoused pearls of wisdom that are frequently heard and then promptly ignored by investors.
That's because nobody wants to miss out on whatever market fad is most profitable at a given time. And no one is more familiar with this than institutional investors who manage money for other people.
As people get increasingly caught up in the everyday minutiae, the pressure on money managers mounts to keep pace with the market. It's a dynamic that has played out repeatedly throughout the 9-1/2-year bull market, which is now the longest on record.
Advertisem*nt
Jeremy Grantham, the cofounder and chief investment strategist at the $71 billion Grantham, Mayo, & van Otterloo, doesn't think this is the right approach.
He prefers to take a much broader view — one that involves looking at unpopular areas that, as a result, look attractively priced compared with the rest of the market. It may mean tough times in the near term but can pay off in spades further down the line.
Not all return-hungry investors are blessed with that much leeway in the immediate term. But for those afforded longer time horizons, Grantham has a big investment pick: emerging markets.
Related stories
Sure, the area has been under serious pressure lately as President Donald Trump's trade war has clouded the economic outlook for China and its EM counterparts, but Grantham doesn't necessarily see that as a bad thing. He views it as an opportunity to buy at cheaper levels.
Advertisem*nt
If you're skeptical of Grantham's suggestion, consider what has made him a world-renowned investor. He predicted the dot-com and housing bubbles that wound up crushing markets. And his otherworldly prescience actually extends back to the late 1980s, when he called a bubble in Japanese equities and real estate.
Business Insider recently spoke with Grantham and got the details around his big contrarian recommendation. Note that his responses have been edited for clarity and length (emphasis ours).
"I like emerging markets, particularly because, in this mess of changing variables, the asset-class level tends to be pleasantly old-fashioned. When you’re talking about an asset class as broad as emerging, and it measures so much cheaper than the US, you pretty well know that it’s accurate.
"When you get hit by unexpected US activities that have weakened EM currencies and made them very nervous about exports, it’s like the good old days. You buy a cheap asset, and it goes down. Been there, done that many times. What do you do? You buy some more, but not immediately.
Advertisem*nt
"You’ve learned the hard way — decade after decade — that you average down reluctantly. You allow the price to be dragged slowly. The market can always hurt you and diverge, despite your brilliant analysis, and go against you quite a lot. More than you think.
"So grind your teeth and hold your reserves back, and then reluctantly let them go and average down. And then, they bounce back, and you’ll make a splendid longer-term return on you averaging money, and eventually on your whole position. That’s the way investing used to work at the stock level. And now, I have no reason to believe it won’t work at the asset-class level.
"Emerging markets look the best. They've underperformed the US market by 10%, making it 10% better. Emerging looks to me like the future. The prices are cheaper. What’s not to like?
"If you get caught in a bear market, and you have to hold these things for 10, 15 years, they are likely to do perfectly well for you. The longer-term return from today’s prices for emerging are likely to be quite acceptable. That’s perhaps not as much as you’d like, but a perfectly dignified compound return. I suspect that’s not the case with the S&P 500, or even other developed areas. It could work particularly well if you tilt toward the cheaper industries and sectors within emerging."
