Jeremy Grantham is an investing legend known for in-depth market insights and opinions. He is pretty much a student of market bubbles. He does give very valuable insights on predicting market extremes and stock bubbles in order to aid investors navigate their way through all the challenges and complexities of investments in financial markets.
His thesis is about understanding market history, resisting herd mentality and concentrating on long term value.
Here are five key investment lessons garnered from Grantham’s wisdom:
Believe in history: Grantham emphasizes the cyclical nature of markets. History tends to repeat itself, and investment challenges eventually pass. Investors should focus on surviving tough times, ignoring misleading market narratives driven by vested interests. Grantham describes the financial markets to be cyclic. History always repeats.
Resist the crowd, cherish numbers: It’s very challenging, but essential that investors resist the enthusiasm of the crowd. They should instead themselves make value assessments and logical calls or rely on some reliable sources and keep on checking their calculations. It is also important to ignore short-term news, thrill based events and focus on simple measurements of value. Herd mentality needs to be avoided at all costs.
Be calm and focus on the long term: Patience, composure and focus is important in exploiting favorable market conditions. Markets fluctuate, so take a long-term view when good investment opportunities come your way. It is crucial to acknowledge the fact that stock prices may stray from their intrinsic values for lengthy periods, but they eventually correct themselves. Here he depends on the theory of reverting to the mean. It is hence simple, everything eventually reverts back to its long term mean i.e., average. Consistently reviewing portfolios and following the mean theory are crucial investment ideas.
Career risk primarily for professionals: According to Grantham, it’s career risk that drives the investment business. Professionals avoid taking bold calls basically to avoid underperforming peers and possibly be removed from fund management. Free from that, individual investors are more fearless. This gives the individual investors significant advantage over professionals but only if they are able to manage their portfolios carefully.
Know thyself: This point is self explanatory. It is simple: most of the successful investors know their strengths, weaknesses, and limitations. If you do not have enough willpower against temptation, you might look for a better manager or index fund with diversification around the world and set aside monitoring activity. Therefore, according to Grantham it is important for an investor to believe in themselves and build their decisions on reading stuff, building knowledge and intellectualism.
The secret to Grantham’s success is buying cheap assets and taking calculated risks. His approach, which has its basis in mean reversion, seeks to avoid irrationally priced stocks.
Hence, to conclude it is important to remember that market inefficiencies and deviations from intrinsic value may persist, but Grantham’s principles remain a timeless guide to long-term investment success.
