Weekly Media Pin – Grantham on Graham

Time for the weekly finance media pin.  Sorry that I have not been active posting lately, but I told you I might be falling into the web of WEB, and I have done just that.  But I’ve also been consuming podcasts, videos, newspaper articles, and other finance related media.

This week I want to highlight an episode of another new (to me) podcast.  It is the i3 Podcast, hosted by MarketFox columnist Daniel Grioli.

First, a tip of the cap to the blogger who goes by the handle Jesse Livermore (follow him @Jesse_Livermore on Twitter and at the fantastic blog Philosophical Economics) for turning me on to the existence of this podcast.

I should also note, primarily so that I can share an Amazon affiliate link, that I am finally reading the thinly veiled autobiography of the real life Jesse Livermore, Reminiscences of a Stock Operator:

I may post about it in the future if I think I have anything of note to share (and can extricate myself from Berkshire videos).

Turning back to the podcast, I wanted to highlight the recent episode with Jeremy Grantham of GMO. I’m sure Grantham and GMO need no introduction, but if you are uninitiated, you should add their stuff to your reading pile.

The interview is a good deep dive into many things, and Grioli has an interesting accent (I think it’s Kiwi/New Zealander, which reminds me of that HBO show Flight of the Concords) that blends nicely with Grantham’s Yorkshire by way of Boston accent.

They discuss Grantham’s career and the development of GMO, covering some topics that have probably been touched upon before but they take their time and Grantham is in a sort of humorous mood.  They end up spending a fair amount of time also talking about Grantham’s recently widely publicized piece about the potential for a bubble “melt up.”

Grantham also shared the thesis previously…including here:

His basic point is that momentum, and even economic changes, can make things go well beyond what might seem reasonable based on past experience and that expect mean reversion to apply quickly and rigidly.  Japanese stocks hitting a CAPE of 90 in 1990, are mentioned as an example where one would have been fired/had their head handed to them if they bet aggressively on quick reversion to the prior mean.

In this context of being open to potential longer term valuation regime shifts, Grantham also talks about one of the last speeches Ben Graham delivered.  The speech was “Securities in an Insecure World” and in it Grantham says Graham noted the vast change in valuations of stocks since his early career and the fact that if one were too rigid in applying valuation norms from the prior era, he would have been out of stocks basically, for good (much to his financial detriment).  Here’s an article discussing the piece.

I am sort of mulling Grantham’s hypothesis over in conjunction with some other stuff.  First, hedge fund manager and Charlie Munger pal, Mohnish Pabrai recently gave a talk at Columbia that discussed some similar ideas. It sounds like he’s still working through it, but has basically decided he doesn’t have to “swing at the pitch” the U.S. stock market is throwing, so he’s invested exclusively outside the U.S. at the moment.

My takeaway from Pabrai’s talk was basically that markets historically go through periods of strong price momentum, which are usually long in duration and then they tend to go through long stagnant periods.

If true, I suppose this could mean many things.

An EMH adherent might say the market discounts a big “step change” in earnings/growth well in advance (like the internet bubble…accurately predicting big growth in earnings, just maybe pulling forward a whole decade of returns…maybe more if you’re CSCO).

Maybe it means the market tends to get ahead of itself due to the madness of crowds and bouts of speculative fervor from time to time and, perhaps unsurprisingly, future returns from rich valuations are very below average (and/or periods of pessimism or under reaction to increases in GDP and earnings follow periods of overreaction to those things).

I think Soros would buy this.  It sounds a lot like his “reflexivity.”  Maybe it means there was only a sample of one when we are looking at history and the tendency is to choose starting and ending points in the movements to try and see a pattern where there is none (humans definitely do this).

Pabrai also highlighted a relevant book: Bull: A History of the Boom and Bust, 1982-2004. I have purchased a copy and have it on my to be read list.  It wasn’t 100% clear to me from his talk, but it sounded like Buffett recommended this to his Buffett Group at a recent gathering.

I would also mention a couple more for your kindle pile.  They are both by Vitaliy Katsenelson:


I read them some time ago and sort of dismissed them as sort of focusing on “unknowable” macro type ideas that are too hard and probably injurious to my returns.  I think I also thought it was potentially just pattern fitting.  They could be relevant to this line of thought/inquiry and you should check them out if you are interested in the subject.

I think the key to Grantham’s point is really just to be cognizant of the fact that the market can go way beyond the “zone of reasonableness.”  To invoke the spirit of David Tepper, “maybe just don’t be so freaking bearish, okay?”

Another answer could be, “You don’t have to swing at every pitch.”  You can start rebalancing away from Japan in 1989 (or 1987).  Yeah you look a little dumb for a few years, but so did Schiller for a couple of years until the internet bubble burst and the GFC came to pass.

Then again, like Graham said in that last speech, maybe you should keep one toe in the water and potentially enjoy some of that nice, massaging, bubble action.  An allocation to a trend-following system to try and limit the risk (but staying mostly long) could be a good option in times of froth.

In any case, food for thought.  If I figure out the answer, I will be sure to share, but it will probably cost you “2 and 20.”  Hah! Thanks for reading.