Friday, January 23

Jeremy Grantham's January Letter To Investors

I love the Internet.  Direct access to real people and their real thoughts is such a great thing.  Here is Jeremy Grantham's January Letter Investors.  It's a fantastic read.  In fact, he references a piece that I highlighted awhile ago in the NY Times by Einhorn and Lewis as "a great job of summarizing where we are and how we got here, as well as offering some helpful advice for the future".  Couldn't agree more.
First, who is Jeremy Grantham and why do I listen to him?  From Wikipedia:
Jeremy Grantham is the Chairman of the Board of Grantham Mayo Van Otterloo, an American investor well known among institutional investors, but relatively unknown to retail investors. He is regarded as a highly knowledgeable investor in various stock bond and commodity markets. Grantham started one of the world's first index funds in the early 1970s and currently manages approximately $120 billion US. Grantham's quantitative research has revealed reversion to the mean in all bubbles in all commodity, stock and bond markets studied excluding timber.

This guy knows his stuff and has been very right about the direction and severity of our current crisis.  I don't think he's a "broken clock" either, he seems to me to be right for the right reasons -- a critical distinction.  This is why I take his perspectives on how we got here very seriously (that and the fact that meshes well with my own understanding of things).
Here's a key quote from the letter that I am in love with:
Ingenious new financial instruments certainly facilitated and exaggerated these weaknesses, but they were not the most potent ingredient in our toxic stew. That honor goes to the economic establishment for building over many decades a belief in rational expectations: reasonable,
economically-induced behavior that would always guarantee approximately effi cient markets. In their desire for mathematical order and elegant models, the economic establishment played down the inconveniently large role of bad behavior, career risk management, and flat-out bursts of irrationality.
He's taking another pot-shot at economists and Objectivism again, which I'm perfectly fine with.  If you're a regular reader of this blog, you know that I have been aggressively illustrating the fallacy of relying on economists as a source of financial guidance.  And don't get me started on Ayn Rand or Objectivism! 
The dominant economic theorists so valued orderliness and rationality that they actually grew to believe it, and this false conviction became increasingly dangerous. It was why Greenspan and Bernanke were not sure that bubbles – outbursts of serious irrationality – could even exist. It was why Bernanke, who had studied the bubble of 1929, could still not see it as proof of irrationality and could still view the Depression (à la Milton Friedman) as a mere consequence of incredibly bad, easily avoidable policy measures.
I wish I could transmit my thoughts with such clarity.  Until that happens, I will settle for surfacing the great works of others.

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