Investment master Jeremy Grantham: Stay away from the crowd, focus only on value

01

Suggestion One: Believe in History

History tends to repeat itself,

and forgetting this puts you in danger.

All bubbles will burst,

and all investment madness will vanish into thin air.

During periods of investment frenzy,

interests of the vested parties, media, and analysts keep stirring you up,

they assure you: the current economic situation is uniquely good,

investment conditions are optimistic,

the real economy has higher and more sustainable growth potential,

even if these views come from the Federal Reserve itself,

you should ignore them,

and not be overly influenced by them.

If the market rises more fiercely,

it is only drifting further away from true fair value.

But in the end,

the market will disappoint you,

it may, in your extreme pain and frustration,

fall back to a reasonable level.

The investor’s task is to survive such market volatility.

02

Suggestion Two: Don’t be a Borrower,

and Don’t be a Lender

If you borrow to invest,

it will interfere with your investment ability.

A portfolio without leverage cannot be liquidated at a loss,

but leveraged investments face this risk.

Leverage damages the investor’s own patience.

Borrowing fuels financial radicalism,

making investors more reckless and greedy.

While it may temporarily increase your returns,

ultimately, it will suddenly destroy you.

It allows people to buy items now that they may not be able to repay in the future.

It has been proven to have extreme temptation,

both individuals and collectives have demonstrated an inability to resist it,

as if it were a hypnotic drug.

Governments have also, since the mid-20th century,

especially now,

seem to have proven their own inability to resist.

Any sound society must recognize the temptation and addictive harm of debt,

and regulate it through appropriate laws.

Interest payments should not have tax deductions.

Government debt should be reasonably limited,

for example,

not exceeding 50% of GDP,

with a 10 or 20-year period to correct the current debt problem.

03

Suggestion Three: Don’t Put All Your Assets on One Boat

This is probably included in all investment advice.

Merchants have recognized this over two thousand years ago.

Allocate investments across several different fields,

and as many as possible,

to increase the resilience of your investment portfolio,

and enhance its capacity to withstand shocks.

Obviously,

when your investments are numerous,

and diverse,

you are more likely to survive during critical periods of decline in your main assets.

04

Suggestion Four: Be Patient,

and Focus on the Long Term

Investors should patiently wait for good opportunities.

If you wait long enough,

market prices may become very cheap,

which is your margin of safety for investing.

Therefore, what investors need to do now is,

endure the pain of waiting when faced with good investment opportunities,

until some of them become excellent.

Individual stocks often rebound from the bottom,

and the entire market also fluctuates cyclically.

If you follow the above rules,

in the long run,

you will benefit from the temporary poor conditions faced by individual stocks,

because you can buy stocks at lower prices.

05

Suggestion Five: Recognize Your Comparative Advantage Over Professionals

So far,

the biggest problem faced by professionals is,

as investment agents,

they must first protect their careers,

which makes them cautious in investing.

The second problem for professional investors is due to ranking needs,

they must be active and aggressive in their investments.

Personal investors can better wait patiently for the right prices,

and do not care about what others are doing,

which is almost impossible for professional institutional investors.

06

Suggestion Six: Try to Control Human Optimism

Optimism may be a positive trait for survival.

Humans are an optimistic species,

the level of optimism among successful people is likely higher than average.

Some countries and regions are more optimistic than others,

I believe the United States is a relatively more optimistic country.

This benefits the real economy,

for example, the US encourages risk-taking,

and failed entrepreneurs are also respected.

However,

optimism is a disadvantage for investors,

especially optimistic investors dislike hearing bad news.

If someone tells you there is a bubble in the real estate market,

they will face criticism.

During the 2000 US stock market bubble,

bad news was like the plague,

hated by all.

Pessimistic professionals will be fired,

simply because people do not want to hear discordant voices about a bull market.

This example shows,

when things look very good,

taking it away from people will make them very unhappy,

even if it’s just talk.

In such a frenzy,

compared to the news-encircled ( sometimes frenzied clients ) of professional investment institutions,

individual investors are more likely to stay calm.

It’s not easy in absolute terms,

just relatively easier.

07

Suggestion Seven: Be Brave in Rare Opportunities

When extreme opportunities present themselves,

you can invest a larger proportion of your funds than professional institutional investors.

Therefore,

if the numbers tell you,

this is truly a severely undervalued market,

grit your teeth,

and bravely join in.

08

Suggestion Eight: Stay Away from the Crowd,

and Focus on Value

In real life,

individuals’ emotions towards the crowd are hard to resist.

Seeing neighbors become wealthy in a speculative bubble,

while you remain outside the market,

is truly a torment for you.

The best way to resist crowd influence is to focus on the intrinsic value of your own calculated stocks,

or find a reliable value measurement source ( and periodically check their calculations ).

Then worship these values like heroes,

and try to ignore everything else.

Especially ignore short-term news: economic fluctuations and insignificant government announcements.

Stock value is based on the company’s future decades of dividend income and cash flow.

Short-term economic crashes have no obvious impact on the long-term value of a company,

let alone on broader asset classes.

Stay away from so-called professionals trying to decipher market trends in the short term,

they will lose money in the long run.

Remember,

the great opportunities that can save investors from pain,

and make money, are very obvious from the numbers: compared to the long-term average P/E ratio of 15 for the US stock market,

the peak in 1929 had a P/E of 21,

the 2000 dot-com bubble peak had a P/E of 35! Conversely,

the 1982 stock market bottom had a P/E of 8.

It’s not complicated.

09

Suggestion Nine: Investing is Actually Quite Simple

GMO has a simple and healthy way to forecast returns across different asset classes: assume profit margins and P/E ratios will move toward their long-term averages over a 7-year cycle.

Since 1994,

GMO has completed 40 quarterly forecasts.

Statistically speaking,

these forecasts are effective,

and some data are surprisingly accurate.

These estimates are not based on complex mathematical theories,

they are simply GMO’s approach of ignoring crowd sentiment,

using straightforward ratios,

and maintaining patience.

The problem is,

even though they are easy to predict,

professionals find it hard to use them due to performance pressure,

while individual investors find it much easier to use them.

10

Suggestion Ten: Be Honest with Yourself

As a personal investor,

you must understand your strengths and weaknesses.

If you can wait patiently,

and ignore crowd temptations,

you are very likely to succeed.

But if you adopt a flawed approach,

being tempted and frightened by the crowd,

following the herd,

entering the market late in a rally,

or leaving early in a rally,

it will be disastrous for your investments.

You must know your pain and patience thresholds precisely.

If you cannot resist temptation,

you will definitely fail to manage your money well.

There are two completely reasonable alternatives: hire an investment manager with these skills,

which is actually more difficult for the manager to maintain an aloof attitude in front of the crowd.

Or,

you invest in diversified global stocks and bonds indices,

and leave it alone until retirement.

On the other hand,

if you are patient,

have a high tolerance for patience,

can withstand herd psychology,

possess university-level math knowledge,

and have a lot of common sense,

then you can go ahead and invest.