The Uncompromising Jeremy Grantham
This article first appeared in The Spectator in January 2007, some months before the great global financial crisis.
We are barely ten seconds into our interview when Jeremy Grantham, onetime bedpan salesman from Doncaster, now a hugely successful money manager in the United States, is off on a favourite tack – mixing it with his competitors in the investment world. In this case what has drawn his ire are some reported comments from a well-known American fund manager whose views I have unwisely chosen to allude to in a recent newspaper column.
“I am going to start with an ad hominem remark” he announces down the line from his adopted home town of Boston, where, largely unknown to fellow Englishmen, he has built from scratch a global fund management business, one that currently looks after more than $140 billion of other people’s money. Mr X (name of the pundit in question deleted) “is the biggest historical revisionist around. Everything he said he has predicted is plain wrong. I reserve to him alone the willingness to mention this fact. Every one of his arguments is flat out wrong”.
Then, before you know it, we are off on a five-minute discourse on the inadequacies of the said pundit, whose face and by-line have adorned a hundred columns in Forbes magazine. After cataloguing a string of alleged mis-reasonings, Mr Grantham concludes: “I have told you everything already about the kind of guy I am. I am a vindictive son of a bitch who never forgets”. The nearest thing to a compliment he can find to say about our mutual acquaintance is: “He has a good line in bullshit and that is certainly not to be sneezed at in this business”.
Mr Grantham is still proud to call himself a Yorkshireman, albeit one who left these shores more than 40 years ago to do an MBA at Harvard Business School and has never found time to return. ”By background I am both a Quaker and a Yorkshireman, which I like to call double jeopardy”. He means that the spirit of “waste not want not, calling a spade a spade, not gilding the lily, and so on” is an ever present in his life. “I cannot even pay for dinner myself” he adds. “My wife has to pay the check”.
The hardest thing he has ever had to do, he tells me, is to tell his English stepfather that he was not going to carry on flogging bedpans for the latter’s modest hospital supply business, but was going to plough his own path instead. After Harvard Business School, where he learnt how to speak confidently in public, but nothing about the stock market, he migrated to Wall Street. There he was soon wiped out financially when a speculative stock he had bought nosedived in value, taking all his savings with it. The experience of the 1960s stock market bubble has stayed with him and shaped his investing philosophy ever since.
If Grantham comes over as an embattled loner, the Geoffrey Boycott of the investment world, that is happily not the case. While invariably opinionated, Mr Grantham’s quarterly letters to his investors are treasured by his devotees as much for their edgy wit as for their insights into future market performance. And you clearly cannot build a business as successful as GMO, his Boston-based firm, without the ability to inspire and motivate those around you.
According to Barton Biggs, a hedge fund manager who was for many years the head of Morgan Stanley’s asset management business in New York, Jeremy Grantham “is a hungry observer of the investment life around him, a seeker of truth, a man of the mind. He doesn’t care what the world thinks. He is an irregular person. He has a hard glitter to him, if you know what I mean”.
Although well into his sixties, Grantham is as committed and as trenchant in his views today as he has ever been. Until a few years ago, when an injury brought him up short, he was still playing a tough game of soccer in a pickup game in Boston. He now has two big passions in his life – the state of the financial markets and climate change – and on both scores he finds himself today in Cassandra mode, at loggerheads with mainstream US opinion.
One of Mr Grantham’s claims to fame is that he as much as anyone proved the case for timber as an asset class for mainstream investors, and this professional interest has led him to take a deep interest in the effects of climate change. When I innocently enquire whether he has strong views on the subject, he replies: “Goddam right I do. My next quarterly letter has a rant on climate change. I am extremely concerned about it. It is going to be the biggest investment issue of the next 20-30 years. It is going to have big impact on forestry, and all manner of implications for start-ups, high tech and so on. We are going to get bored to death with the topic”.
The polar ice, he says, “is melting much faster than even the bears [pessimists] feared ten years ago. It is a great threat to food production and to food prices, and perhaps to health as well”. Australia, he adds, has refused to sign the Kyoto agreement, but is amongst the worst afflicted countries. Drought-ridden and parched, the country is a potential “basket case” in the making.
“There is a bug in Alaska that used to breed once a year and now breeds twice a year. Over the last five years, that has killed all the trees for hundreds of miles, as far as you can see. You can multiply that many times over – probably more hurricanes, certainly more floods”.
As for the financial markets, for many years Grantham has been dubbed “a perma-bear” because of his tendency to say negative things that others in the business find inconvenient. On Wall Street, as in the City, by and large, next year in the markets is always a good year in the making. That is what the punters like to believe and what the big investment firms like them to hear.
As a fully paid up member of the awkward squad, contrarian by nature and by professional inclination, Grantham takes pleasure in telling it differently. He insists that he can be wildly bullish at times. He was bullish throughout the long bull market in stocks of the 1980s, raved about index-linked bonds in 2000, and real estate and emerging markets in 2002. His biggest mistake was to call the end of the greatest bull market of all time in stocks two years before the peak in 2000, something which his competitors (and some of his clients) have never let him forget.
At the moment there is no gainsaying that he is very bearish, primarily about the stock market, but also, unusually, about most other types of investment asset as well. Even his beloved timber (now yielding just 5%) is no longer the bargain it once was. “The stock market is overpriced. Everything is overpriced. Junk is king”, he tells his clients. That he means is that, buoyed by cheap money, few if any financial assets now offer sufficient reward to justify investors for the risk that they are taking.
So where then? “For the moment I say don’t be too proud to own cash. You always feel there must be something you can own that will do better [than cash] and usually there is. In 15 years of doing asset allocation for clients, we have never once owned cash. We could always find something better – but now we can’t”. Equities as a class, he predicts, will deliver below-average (and in the case of lower quality stocks, negative) returns over the next seven years.
The cautious investor, he argues, should therefore be preparing for trouble ahead. The stock market may still go up this year on a wave of momentum buying, but investors should be tilting their portfolios towards less risky assets. In the pension fund he manages for his sister, that means conservative hedge funds, cash and high quality stocks; plus some emerging market equities.
With their high growth and low multiples, the latter are the only equities other than blue chips that still offer some risk-adjusted reward today. “Net, they will do very well if the market stays intact and after getting really whacked in some sort of crisis will probably rebound and do less badly than other overpriced segments of the equity markets”. That there will be some sort of market crisis however, he does not think is in doubt, any more than that climate change is a reality that is getting away from the human race.