Grantham: Cash is Not Good
Grantham: Cash is Not Good
US publication Outstanding Investor Digest arrived on my desk yesterday. This excellent quote from GMO's Jeremy Grantham is on the back page.
“It was psychologically painful in 1999 to give up making money on the way up and expose yourself to the career risk that comes with looking like an old fuddy duddy. Similarly, today, it is painful and risky to one’s career to part with your increasingly beloved cash – particularly since cash has been so hard to raise in this market of unprecedented illiquidity. As this crisis climaxes, formerly reasonable people will start to predict the end of the world, armed with plenty of terrifying and accurate data that will serve to reinforce the wisdom of caution. Every decline will enhance the beauty of cash until, as some of us experienced in 1974, ‘terminal paralysis’ will set in. Those who were overinvested will be catatonic and just sit and pray. Those few who look brilliant, oozing cash, will not want to easily give up their brilliance. So almost everyone is watching and waiting with their inertia beginning to set like concrete.
“Typically, those with a lot of cash will miss a very large chunk of the market recovery…. In June 1933, long before all the banks had failed or unemployment had peaked, the S&P rallied 105% in six months. Similarly, in 1974, it rallied 148% in five months in the UK! How would you have felt then with your large and much beloved cash reserves?
“Finally, be aware that the market does not turn when market participants begin to see light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.”
GMO Article, Reinvesting When Terrified – March 4, 2009
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Which I guess, Steve, is why we should try to price, rather than to time. However, here's the dilemma, as I see it. When you 'price' you're, generally, trying to put a value on the future cash flows (some may say, they're not interested in doing so, because they'd rather be 'vaguely right than precisely wrong' and so they're happy to just apply a 'low' PE ratio blah, blah - however one cannot escape this basic truth, and a particular PE implies a particular cashflow stream). The point is, we need a valuation based on a cautious estimate of future earnings. If we assume depressed revenue for 1 year (for some business this may reasonably mean zero earnings) then we will get one valuation (or one effective PE), if we assume 2 years of depressed earnings, then we will get another valuation (or, another effective PE). In order to give ourselves a margin of safety, we might want to assume a fairly negative scenario. Is this 1 year of depressed earnings, or 2, or 3? And should the depressed earnings be based on a 20% revenue contraction, or more? If we're too conservative we will miss the boat. If we're insufficiently conservative, we will pay too much. Anyway, tha's enough rambling from me.
The same edition of OID also has this quote from Seth Klarman (one of Gareth's leading lights), "For years when someone asked me what my biggest fear was in managing my portfolio, my answer was that is was buying too soon on the way down from often very over valued levels. I knew a market collapse was possible. And sometimes I imagined that I was back in 1930 after the market had peaked the year before, and then dropped 30%. Surely, there would have been some tempting bargains then. And just as surely, fou'd have been crushed by the market plunge since then. And just as surely, you'd have been crushed by the market's subsequent plunge over the next three years - down to below 20% of 1929 levels.
A fall from 70 to 20, and from 100 to 20 would feel almost exactly the same by the time you hit 20. Sometimes being too early becomes indistinguishable from being wrong."
You are right. I think the quote by Grantham is misleading at best.
AWSJ published a chart in the NOv 24, 2008 paper - showing how Dow Jones dropped 89% from Sept 3, 1929 to July 8, 1932 - a total of 846 days.
At the current levels, DJIA is less than 50% down from the peak. In other words, DJIA has to reach a level higher than the peak in 2007 in order for you to make 100% gain. So how can one compare today's market with 1930s??
In the 1930s, assume a stock went from 10 bucks to only 1.10, Then it bottomed and recovered to 2.20 - that's 100% gain. But it is still 7.80 down from the peak - 78% down !!
Hello - he is playing with nos here. Don't be fooled. At best in the current bear market rally - you can make 20-50% max with the risk that you can also lose 50% or even more if the global recession drags on. Who dare say that DJIA will not drop say 80% in the coming years?? from the peak.
An honest analysis of this kind should involve showing charts and absolute figures - don't play with percentages. It is always used to fool people.
Steve, if you guys think that inflation is going to be a huge problem in the future, don't you think you'll be losing big in real terms if you invest today?
If government bonds are far underestimating long term inflation, what discount rate should you use?
I am in cash and have been since August 2007! Why - because I can!
For many years I have spent less than I earned. For that reason I can now earn a comfortable living (new car every 3 to 4 years, overseas holiday every 2 to 3 years - usually Europe or Asia - not Indonesia) trading/investing in Australian UNLEVERAGED equities using the LONG side only of the market.
I am quite easily able to withstand prolonged periods such as we are now in as even in these times there are still long side opportunities - quite a few in fact.
My system (investment in the long term - 6 months to 6 years) usually takes me into a long position 6 to 12 weeks after the market has turned up and takes me out within the same timeframe after the market has peaked. This means I am able to capture a large portion of the upward trend. I am able to do this 75% to 80% of the time. On the occasion of my few losses, those losses have never exceeded 6% of the amount I had invested in that stock.
I am not brilliant but, neither am I greedy. I enter trades/investments only when I feel I have the odds strongly in my favour - it seems to have worked very well for me over a long period of time - including the down market in 2002.
In short then, I can see no reason to rush out of cash and back into the market until such time as the market tells me it's ready. Ready in the way it suits the way I trade/invest.
Cheers
Lee
How would you have felt then with your large and much loved cash reserves?
1 Like I'd missed exceptional opportunities.
I'd be concerned with why I missed out and would ask myself:
1 Do I have a framework that helps me select investment opportunities?
2 Does it work over the long-term
If the answer to these questions is no, then I have a problem and I'd use my time to educate myself.
When in the possession of information, such as a business making more sales or cutting costs, etc we humans are generally good at anticipating consequences. Too often people don't seek that information or, if they receive it, don't act on it. Instead we might wait for the annual or half yearly report by which time the results have been generated and the business has been 'revalued' by the stock market participants.
Understanding a business as if you'd worked there for 10 years is a great way to understand what might occur in the future due to it's efforts today.
You can't make a sikl purse out of a sow's ear and you can see the ugly duckling will become a swan by looking at it's parents!
HI Lee,
That si exactly what I used to do and what I would have done if I hadn't had a truck run into my car in August 2007 of all times when I was almost fully invested..just begun to withdraw. Unfortunately I didn't even look into shares /super agin until February 2009..AARGH! My hea dis still not clear and my thinking not the best, but enough to read and make out almost what is gong on!!!
So I thought maybe the market was doing its typical first bounce in january/FDebruary..then it dtarted plunging agin..so I sold out , just at the wronfg time of coutse..about March 9th to 12th. I felt at the time that IF I had been fully incash bak in 2007 which I would had been , all things being normal, Then from teh trading I was observing in CBA particularly around the 11thMarch? that some big money may be trying to move in and this is when I should be moving in..
anyhow moved back in about 25% gradually from 17trh March to 25th March..and now just don't know what the heck to do!
It's real easy IF you are in cash and I echo your sentiments..precisely what I'd do in that situation.. its when you've lost already.. and can't afford t ,lose any more...especially when you can;t work any more:-)
So I now understand the dilema and feel real sorry for the elderly . I went to an investment advisor..first time since 1986 or was it 1987.. the day before the crash of Japan anyway..when I was "advise" to put all in Japan..I cancelled the check the next day! Anyway back toi the present.. the investment advisor told me to "you are supposed to hold".. and as I'd aready taken most out at the itme.. to invest in "conservative"..sigh They just don't get it.!! I prefer cash to bonds at present!!
So... I just wanted to say I guess, have aplan somewhere if something happens to you..and think what the lderly must be going thru.It really is entirely different if you dont have a super fund that isn't "fixed" in its allocations ..or comparatively.
I did , at the time of investing , make strong comments on the lack of any capacity for funds to move money or monitor the best asset classes and swicth for investors..they have ver strict "limnits " on ranges in most funds. I note Blavk Rock Asset Alpha allocation is the ONLY one (and a new one) that I can find who tries to do this!
I also complained about the lack of any real ability to really get any sprea dor cblanace.. nearly every 'global" fund was mostly in US shares and mostly the same ones too etc
So basically I have to decide just what the market IS doing..
I don't like bonds at present ..I may be wrong here.. but with the ME and the low interest rates for starts , there doesn't seem to be a lot of lowering of yield left. I did switch to binds back when interest rates were in their teens and rode them down and out of the share market the,,.. I even hgot out back in 1987, so I thought I always would...
Not trying to feel sorry for myself.. just wondering what the heck one should do..and to say just how diddifuclt trying to overcome any "oaralysis" actually is.It's quite incredibly dificult and I wouldn't have believed it if it wasnt happening to me. I think its partly a wooly ringing head so I don't trust myself.. but what must it be like for others who get elderly..
So before you and others get there...wjhat startegy have you got for yourself.
If I can help anyone else be prepared in the future this reply is worth it:-)
Jan
[...] course, that might all be priced in. Fund manager Jeremy Grantham said the market doesn’t turn when there’s light at the end of the tunnel, it turns when ‘all looks [...]
Jeremy Grantham appears to have made a good call. His newsletters offer an interesting approach to investing and help as a check for my psychological biases.
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