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that big "bubbles " are associated with great investment ideas that have been overdone. This should be serious, and ideally—obviously serious. Railways are the best example, followed by the Internet. If you see that railways will change the world, then, of course, you want to invest . This was precisely due to their obviousness and importance.
The Internet —most people could see that it was quite serious and that it would eventually change the world. Amazon grew sixfold , somehow, in 2000. Although it was a successful idea, the stock fell 92%. Check this out. They fell 92% during the crash, then rose again to conquer the world. This is, to some extent, not exceptional.
This is what you should expect. So now we have Nvidia looking like Amazon squared. Funds that dwarf any capital program in history. Everyone is clearly aware that this is the most important thing that has ever happened in their lives. And they are right. That's how it is. That's why the investment program will almost certainly be overdone.
I'm Ted Sides, and this is Capital Allocators. My guest today is Jeremy Grantham, co-founder of GMO, a $100 billion investment firm in Boston that he founded in 1977. Over six decades in the markets, Jeremy has become one of the most respected and outspoken experts on value, market bubbles, and long-term investing.
He recently published The Making of a Perma Bear with Edward Chancellor, a book about his career and the investment lessons he learned. Our conversation begins with Jeremy's early lessons in frugality as a child in war-torn Yorkshire, and his interest in numbers and investing. We trace his career from the founding of Battery March and GMO, the "golden age " of value investing, the painful lessons of the dot-com boom, to the challenges of today.
We discuss Jeremy's methodology for spotting and navigating market bubbles , career risks, the current AI investment boom, and conclude with his important philanthropic work to make a difference in the environmental landscape , along with his foundation's investment strategy. Before we begin, after a long winter, we are starting to see the first sprouts with the change of seasons.
Spring training in baseball, March Madness in basketball, and the Sunny Double in tennis remind us that hope dies last. But today it is harder to be optimistic about a different list of problems. Private market liquidity, world peace, and trying to keep up with my son Eric in creating witty videos to spread the word .
Right now, I can't figure out what will happen to private lending, how the private equity bottleneck will ease, what benchmark is supposed to replace the S&P 500, or why so many people have been reaching out to us with comments about Eric's lack of interest in the show. But I know the answers are waiting for us from our incredible guests, and you should encourage all of your colleagues to listen and learn this truth.
Thank you very much for spreading the information . Please enjoy my conversation with Jeremy Grantham. Jeremy, thank you so much for joining me. This is nice. I would like you to take me back to those aspects of your upbringing that influenced your beliefs and path in investing. Perhaps the main thing was that I grew up during World War II.
It was everywhere around us. Blackout, people walking around checking if our windows were covered , no cars. The cars were parked on supports, there were several taxis, each car had curtains on top to prevent light from entering the sky. Everything was missing. I did n't know this because it was my life and I was very young, but I saw that everyone was in this state.
Nothing was allowed to be wasted. The thought of leaving anything on the plate was a real horror. Everywhere you went, there were lines for food. There were queues even for bread and potatoes, the most basic things. Almost everything was on the cards. At the end of the war, to get anything resembling meat, you had to collect cards for several weeks, then trade them and court the butcher .
What aspect of this situation do you think influenced your thinking? I think thrift was the main feature of wartime. I lived in the north, in a coal mining town. Yorkshire, our county is known for its thriftiness. So, that's two strikes . Then the man in the family, my grandfather (my father was overseas and died pretty quickly in World War II), was raised a Quaker.
So that was the third strike. When you're a Quaker in a Yorkshire mining town during World War II, you know full well that thrift is in your blood. When I go to a restaurant, I still look at the menu and consider the price. I know there are many of us like that. For some of us, it's not a question of whether you have money in your piggy bank.
It's a question of what is right. and wasting money on pointless dinners is pretty high on the to-do list. When you were a child, did you experience the value of money? What exactly led you to become interested in the world of investments? I was fascinated by numbers. I grew up playing Monopoly. Seriously, I was marking numbers on a small roulette wheel, pretending to watch endless cricket matches.
My cousin and I spun roulette and made notes in a small notebook. Numbers that fell out: in our naive 13-year-old heads there was an idea that we could create a foolproof system , and it's a good thing I got sick of it at 13-14, which I did. I remember my first day at a casino in France; I was 20, had saved up a few pounds, ready to invest them in an experience, so at 2:30 when it opened, I went in, accompanied by five little old ladies.
They removed the covers from the tables that had been covering the green cloth from the sunlight. And for the first time in my life I played roulette in a real casino. Lost a few pounds and left feeling the experience was worth it. I grew up thinking about numbers, pondering the causes and consequences of gambling.
When I had the opportunity to buy stocks at 16, I took it to see what it was like. What was that first action? It was Acro Engineering. Class A shares. Acro had a patented type of scaffolding that was not bad. They sold very well. They grew well. They accumulated too much debt and went bankrupt. Not because the product wasn't selling, but because of over-expansion.
Very common. I understand. What were your other early steps in investing before it became a profession? When I was in business school, I met another Englishman. There were few of us. We shared investment ideas, went to the library, and read what we considered to be our unfair advantage— extremely expensive publications with recommendations for all stockbrokers.
Of course, today I would n't give a single penny for them, but back then I thought it guaranteed us success. So we took the money we earned from our summer job and invested it in a few well-known stocks at the time, like Magnavox. We were fooling ourselves. We considered ourselves cool pros, knowing nicknames like " Maggie" for the stocks we owned.
By the way, the bankrupt Acro Engineering company had an interesting nuance: when I moved to America, I sold my share to my mother, who also had a small stake there . The commissions were quite high. So we made a fuss to save on commissions. I tripled my investment from 16 to 24. Nothing special, nothing terrible.
And she bought it from me at a good price with no commission. and, unfortunately, it actually went bankrupt with it. Throughout your educational journey, you have often shared your thoughts on business school and its value to investors. It would be interesting to hear your thoughts on this. It's a unique experience for everyone.
I was happy to get a superficial knowledge of the whole business, to learn a little bit about everything that would have taken me years to learn, and that would definitely have left big gaps. So there were few gaps. You were getting this outer layer of awareness about everything. It gave you the confidence to communicate.
Outsiders would call it overconfidence. But when you look around, you have to admit that the most important thing for success in life is to be confident. The worst thing is the lack of confidence. This prevents you from moving forward. Accusing business school of teaching you to be self-reliant, and to some extent it does , isn't such a bad accusation.
Where did you go after graduating from business school? I was trying to get into the investment business at Donaldson Lufkin and Jenrette. They had a vacancy for me, but it didn't work out in Europe. In the end, I panicked and went into general management consulting, as many do. This gives them time to think more seriously or for a longer period of time about their career preferences.
It took me a day or two to realize that management consulting was a waste of time for me. Why is that? Back in business school, we, three students, took on a consulting project. We were paid an incredible amount of money. At the end of the summer project, after 60 days of work, I received $6,000, which was equal to the cost of a year of business school.
This covered half of all my expenses. This summer job was servicing a garden supplies business. We drove around the Midwest from one garden center to another, two of us taking notes and stuff . And when we got to Manhattan at the end of the summer , it turned out that each of us worked for three of the largest consulting firms.
So, we decided to have lunch the first few days and bring everything that was in the business related to the home and garden products business with us so we could compare it. Each company, by coincidence, has done one good project. We read them and discussed them over dinner. They were surprisingly superficial compared to what we knew about the home and garden products business.
We had 60 days, which is a long time, and our future depended on the results. So we tried very hard, but the difference between what we considered knowledge , which is many levels of business, and what they knew, seemed extremely superficial to us. Within the first week, I realized that consulting is exactly that: a quick overview and usually a very superficial approach.
I couldn't wait to get out of there. What did you do in the second week? He was lazy and moved slowly. I did what I was told and it took me 18 months to find a good job in the investment business. The deciding factor was who was having fun. I asked my classmates who had the best time. Those who worked in the investment business had the best time by a huge margin.
There was a fascinating micro-bubble happening in the small-cap stock market. They had a great time: meeting, sharing ideas, speculating, losing money, making money. Absolutely fascinating. I was filled with this excitement and realized that this was a pretty good place to start. So with the help of some of my classmates who were already in the investment business for the first year, I implemented a fairly effective search program in Manhattan, Boston, and London.
Eventually, I got a decent job offer from Keystone Funds in Boston, a company that has long since ceased to exist. What was your journey from your early days in investing to founding GMO? Meanwhile, I co- founded Battery March with Dean Lear. It only took me nine months. I moved from consulting to Keystone Funds and they offered me a 50% salary increase, which blew me away.
I thought, what the hell is this ? I would be happy to come at the same rate, maybe even lower . This extra 50%. They were amazing. I looked around and found that the entire industry works this way. Everyone in the investment business was getting paid about 50% more than they would for equivalent work and equivalent talent elsewhere.
Why might you not like it? By the way, I did one or two innovative things. So, I got off to a very good start. After eight months, I invited one of the senior staff members, Dean Liron, to come work with a friend I had met who was also in the investment business at another firm . And we thought we could start our own small company.
This is what I understand— self-confidence. He had been in business for two or three years. I had been in this business for six months, and we were about to open a firm. We made an offer to Dean and he said he would think about it and then agree. No, he didn't want to do that, but yes, he would do something like that.
He's going to start his own company, and will I come work for him? Dean, I, and the secretary started working in one room at the end of the street. After 8 years, I had a falling out with Dean, mainly over profit sharing and intellectual merit. So I left, my partner Dick Mayo also left, and four or five other colleagues of ours.
We stayed in the same building. We took the portfolio with us. I joked that he kept his name, and we kept our portfolio. He quickly switched to computer implementation of his ideas. And we continued to select stocks manually, using valuation methods , dividend discount models, etc. We seamlessly transitioned our portfolio from Battery March to GMO.
We achieved quite good results in Battery March. Dick Mayo and I ran the portfolios, and Dean ran the propaganda machine, which was damn effective. We had excellent performance, mostly in small- cap stocks, not exclusively, and 100% in value stocks, which was not popular at the time , as the Nifty 50 dominated: Avon, IBM, Kodak, Coca-Cola.
We bought shares of Great Lakes Stock and Dredge and similar unknown companies, which gave us an unfair advantage because no one was following them. The management could talk to us for hours. No one called them for weeks. Insider information wasn't even a well-known term back then. No rules have been adopted yet.
So they told us how they were doing. And we were one or two professionals on one side of the equation, and all the other stock owners were in town with Twin Disc Clutch, which seems to be in Oak Claire , Wisconsin. And all the friends and family of the founders are, no doubt, very good people, but they were amateurs in the stock market.
It was an unequal battle, we had more information and experience, so we won. In eight years at Battery March we drew once , won six times and lost once, but on average we won six points a year during those eight years; so we had results that would be considered phenomenal then and now. We brought this methodology, this fund, and this portfolio with us to GMO .
It all started absolutely heroic. Of course, we didn't know how lucky we were. You never appreciate early success enough because you don't know what failures are waiting around the corner. We won the first nine years in a row. Imagine you are starting a business— this is a great time to do it. And we won an average of eight points per year.
To prove our capabilities to the world , it was very important to surpass Battery March, because we were appropriating their results. They claimed that we were worthless subordinates, but we confidently bypassed them. What happened to the business during these first nine years amid such brilliant results?
We realized that to buy great stocks, you don't have to have huge amounts of money. We decided that around $250 million was the limit. Dick Mayo was a serious senior portfolio manager. He was happy to stop and tell others off. We had this dynamic result. We were completely full and we almost had to chase people away with a stick.
We thought it was perfectly normal, which gives us goosebumps when you think about it. What happened next? Obviously, GMO has become much bigger than $250 million with interest. We quickly felt uncomfortable with our slightly different approaches to investing. By chance, we came up with a clever formula: create three divisions.
So, Vanelo was leading an international direction that was completely new. Nobody was involved in international markets . Dick Mayo inherited our joint portfolio and managed it for another 15 years. And I created a quantitative division, which started by developing an expert system, explaining to the computer what we considered reasonable characteristics for a good stock.
At first, the computer gave terrible ideas. How did it get there? How can we rule this out? So we rewrote the formula until, slowly but surely, over a few months, we got her to produce a portfolio that was 90% identical to ours. Interestingly, the 10% that differed performed just as well as our 10%.
We called it a finished product and very carefully implemented it into work. We received some big bills. Later, as we became more confident, we used the same model to test it on other stocks. So we have a growth fund in addition to the value fund. And then we had small cap growth funds , small cap value funds, REITs, and eventually an emerging markets fund— all using quantitative approaches, but also with a willingness to think outside the box, look for exceptions when things were going wrong, and change things.
Something between a modern quantum model and an expert system. At what point did you see that your models might not be as foolproof as you had initially hoped? We've always had these lulls in the value business. The price has gained during the 80 years, but only in two out of three years. From time to time there were two- or three-year intervals when the results were very poor, and then they soared again .
Back then, it just completely crushed growth stocks. This gave an advantage of three to four points per year. So, enough to really count. There were few long intervals that were too difficult for us. The first one fell on the great technological bubble of 98-99-2000 . Even that only lasted two and a half years.
A spectacularly painful two and a half years. This opened up a new environment for us where customers could get fed up with you very quickly and become quite aggressive due to the internet bubble of 99 . At the end they treated us as if we did it on purpose so they would lose money. This wasn't the usual mild dissatisfaction that arose when you were a year or two behind.
This was something new for us. It was: What the hell are you guys trying to do to us ? You seem to have completely lost your mind . Everyone in the world knows that growth stocks and the internet will inherit the earth, and you're kind of stuck in a world of value that's taking the backseat. It's interesting that they didn't fall.
We were making good money, more than the pension funds expected to make, but we weren't making as much as those stars on the other side who were outperforming the growth index by choosing even riskier portfolios. This led to our release. I say in the book that people think you get fired for underperforming in a bear market, but that's nonsense.
In a serious bear market, the client falls into catatonia. Terminal paralysis — that's what we called it in 1973-74. Getting a job was a difficult task. Left foot forward, right foot forward. This is what pension fund employees felt. They were in the same mood. They were all frozen with horror. They didn't fire you until the bear market was over.
Then they reviewed the data and fired a few. But during the big internet boom, people were so excited. Their colleagues who managed pension funds made so much money. The guys they played golf with were passing them by, and it was unbearable. Who likes to see their friends get rich when you don't do it yourself?
So they fired you very quickly. We have only shown worse results for two and a quarter years. But after a year and a half, we were fired, as if it was fashionable. We've lost probably over half of our market share in two and a quarter years. We fell from 30 billion to 20. Everyone else doubled their fortunes in the bull market.
This was a huge marketing lag. After the rebound that turned these flows around, how have you been thinking about the intersection of long-term investing, business success, and investment management? I took this very seriously. No one came back after being fired, even though we were right for the right reasons and made a ton of money.
It so happened that new clients arrived. They looked at the ruins, saw our results, and we shouted about it on every corner. The person who is the boss at Wharton now, Jeremy Siegel, I argued with him over and over again, and then separately with Abby Cohen and Jeffrey Applegate. All the leading famous "bulls " of that era.
I had to debate. I decided: if I'm going to go down with the ship, let everyone know why and what's happening. This helped us attract business. There were a few other people doing the same thing we were , but they were hiding under the table, and we weren't. Business tended to go to us. Our lead times were sensational because we didn't fall during the big crash.
The S&P fell 50%. The NASDAQ fell 80%, which is a lot. We actually made quite a bit of money in 2000, quite a bit in 2001, and held on to half a percent in 2002, which was minus 22%. The third year of the bear market, and the S&P is down 22%. This was serious. We didn't fall. We grew up well. Even our asset base, although people were still following inertia.
Our assets grew from 20 billion to 22 billion. And after that, we had double-digit alphas in quite a few of our funds for four or five years. Today, we would be delighted, no matter who we are, with a 2 or 3% lead over the market, but we had 11-12%. several years in a row in international funds and US funds, and in all these large funds that we managed.
It was a very interesting experience. You could look at the risks, at the lost assets, and I started asking questions: what is happening? What was the meta-message? And the meta-message is that if you are a big company, you cannot fight a big bull market. This is ridiculous. This is a terrible business.
You have to adapt to circumstances. Try to be more assertive during downturns and ups and bounce back faster. Get out faster when falling. Just act, speak confidently, and you won't find yourself in serious danger. But if you're fighting a bull market, you'd better expect to lose a lot of business. You will never hear advice from Goldman Sachs or JP Morgan to get out of the market because it is ridiculously overvalued.
Today, everyone knows that he is ridiculously overrated. But no one can tell you that, and never will. I understand that perfectly. I started thinking about this largely because of the pain of the tech sector crash. How does this affect investment strategy? You suggested a game theory exercise: if you don't get fired for underperforming in a bear market, and everyone loves the bulls, that means from a business perspective it's always a good idea to be "long" on the stock.
Yes, that's right. You can't afford the luxury of even trying to do it our way unless you're independent. An individual can do this , and I highly recommend trying it if they follow the market and can just look at the data. This is not higher mathematics. My favorite " bubble" was the housing market.
The housing market was statistically a bigger “bubble” than any stock market “bubble” in America. The American housing bubble of 2005-2007 . It grew wonderfully for three years, and then fell symmetrically back to where it came from, as a multiple of the family's income. This is what it looks like. It attracted about 3% more people who would normally never buy a home.
So instead of 62%, the indicator increased to 65%. And then those 65% of the poor people went back to 62%. Squeezed them out. It cost them a lot of money. Cruelly. This is behavior. The incarceration of these people should have been stopped, but it has n't happened. We found that every bubble burst, and we charted all the major bubbles in currencies, commodities, stocks, and bonds.
In large countries, there were no exceptions to the principle that the market is overvalued at the two- sigma level, which is only a statistical indicator. If you look at the price, you will see an upward breakout. If it's two sigmas, then there's no exception to the rule that they all reverted to the trend that existed before the bubble.
This is a very strict test, and there were quite a few of them. Then classics like Japan, the biggest bubble in history in '89, went way higher than anyone else. 65 times higher than profits. The price you pay when that happens—you still get back, but instead of two years, you get back in 20 years, and that results in a lost 10 or 20 years, like in Japan.
It was the same in 1929, it was the same in 1972, the Nifty Fifty , it was the same during the dot-com bubble, the housing bubble, and of course the Great Financial Crisis. And it will be the same this time . Of course, there was never any statistical doubt. This is something that no one seems to be making a fuss about except me.
During the time I debated with Jeremy Siegel, I asked an audience of professional analysts to vote on certain issues at the annual financial analysts' meeting in California. There were 1,200 of them, I remember the number, and we asked who considered themselves a full-time equity professional , and about 400 people declared themselves as such for the institutional business.
These are professional financial analysts, and I said: I have two questions for you . One of them: the market is currently valued at 31 profits. If it goes back to 17.5 anytime in the next 10 years, does that warrant a major bear market? Everyone agreed. None of them thought otherwise. So it's time for the big question: How many of you think it will return to 17.5 sometime in the next 10 years?
Over 99%. Less than 1% of the " engine room " employees who worked at Goldman Sachs and JP Morgan believed in the data about a new golden era. And 99% of them believed the data that guaranteed a major bear market. However, people during that great dot-com bubble thought that opinions were divided. Yes, there were a few bears , silly old bears, who got carried away, but the main message from JP Morgan was that everything would be fine.
Their own "engine departments" completely agreed with me and disagreed with their own propaganda department, which was supposed to reflect what a sound business strategy required. And no one was interested in this dichotomy. And I could prove it. I had the voting results. Isn't that amazing when you think about it?
To Keynes' credit, he laid it all out in the famous 12th chapter of The General Theory in 1932, and noted that career risk is everything. The key to controlling career risk is to never make mistakes alone. Make sure you do the same thing as everyone else. As he said , be faster and more agile in execution.
He is right. It's amazing how aptly he noticed this. The rest of the world still hasn't realized this. He was the only one stupid enough to admit what I was telling you. Everyone knows that this is so. But most of the time they prefer to remain silent, and he foolishly opened his mouth. You have to play while the music is playing .
It didn't change anything for us. We decided that because we were independent, we could make bets that others couldn't afford. We could lose business for several years. But everything went back to normal . We went from 32 billion to 22. And then in four years we grew to madness. We grew from 22 to 165.
We decided that yes, this is a thorny path. I completely sympathized with the big players who couldn't do it and, in fact, shouldn't have . But while we were small and independent, we could act as we pleased . So we do n't change anything. In every bull market, we are considered the ones who have lost their way.
A simple short bull market means nothing to anyone. The only thing that matters in investing is the emergence, formation, and collapse of large "bubbles." This determines everything. If you can avoid half the pain, it will change everything for the better. When you think about how to take advantage of what is statistically a price “bubble ,” you face a problem: you don’t know how long it will last or how far it will go.
How did you consider these realities when investing capital on behalf of your partners? It's easy to see the "bubble". Guessing the right time is obviously impossible. We have worked on many options for this issue. Keynes said that the patience of customers is not as long as the market's ability to be irrational.
And this is absolutely true. And during big bubbles, they don't just reach two sigma, which is already bubble territory. They reach two and a half or three sigma and last for years. Only they have real meaning. It is the last year or two that are crucial. Customers become impatient and can't stand it.
They start to fire you. As we grew older and wiser, we may have chosen our words more carefully. We have long made it clear that American stocks are not the best choice for investment right now. You should hold non-US stocks , developed market value stocks, and emerging market value stocks. When I argue with people , I don't have time to explain that what matters is not what you don't have, like the US stock market.
All that matters is what you have in your portfolio. If your assets are performing better, who cares that you don't have the US? The US market is simply overvalued from start to finish. If you have to own American stocks, and many do, they should be quality stocks because they have a margin of safety.
In 1929, people discovered that value stocks had a dangerous tendency to go bankrupt during the Great Depression. And companies like Coca-Cola, which were terribly expensive, didn't go bankrupt. After all, that was the only way to stay afloat. Those who invested in overpriced blue chip stocks in 1929 survived if they didn't use leverage.
And those who used leverage went bankrupt regardless of the portfolio, while value market players mostly went bankrupt because they had low-quality companies that could not withstand the depression. There are some good lessons hidden in the popular memory of the stock market. In the book you discuss creating a model that would suggest that you are in the later stages of a " bubble." I would love to hear what you realized while creating this model.
I developed a unique rule that has only worked four times in the history of the United States. Stocks that were growth leaders, rising 70% in 1928. Meme stocks in 2020: they take off, but then start to lag the market dramatically, although the bullish trend continues. Now think about how unusual that is.
They have a very high beta. They should grow one and a half to two times faster than the S&P, and in the early stages they grew three times. And then suddenly the “ blue chips” continue to grow . The S&P continues to rise, while they fall. They can't even stay in the positive zone. In 1929, the S&P low-cost stock index, which had risen 70% the year before.
The day before the crash, it had fallen almost 40% since the beginning of the year. It was a real cry of despair from the very depths of the stock market. The market breadth was not very good. But that's just nonsense. Nothing like that happened again. The tendency for volatile risk stocks to underperform in a bull market continued until 1972, the last year of the Nifty 50, which was followed by the worst bear market since the Depression.
Still ruthless. Everything went downhill: small, big, absolutely everything . The bear market of 1973-1974 was preceded by the 1972 market, when blue chips rose by 18%. And the average stock on the stock exchange fell by 18%, such symmetry allows me to remember it forever. And after that, nothing like that happened until 2000.
Remember how in 2000 the market tanked in March, but the S&P actually reached the same level again in late September? Growth stocks were down 40 or 50% at the time. They made up a significant portion of the market, which meant that the rest of the market had to grow by 15, 16, 17% to balance the figures.
It's quite surprising that Coca-Cola rose 17% again to offset the decline in leading growth stocks. Nothing like this happened until 2021. In 2021, you may remember that Katie Wood's portfolio began to decline rapidly and lost about 35% by the end of the year. However, the S&P index continued to grow very well.
I had a "meme stock ," I didn't realize it at the time, that I invested in as a venture capitalist— QuantumScape, with second-generation batteries for cars. They didn't have a product for several years . So, they had no profits, or even sales. And yet they went public through a SPAC in 2020. This was before Katie Wood's stock started to fall.
Mine started falling out in December. They came out at level 10, as is usually the case. By the end of 2020, the price had soared to 131. For a moment, the company was worth more than General Motors, with years to go before first sales. This dubious startup—by the way, it's a great research paper. I shouldn't say that for the sake of a good story.
This is great research, but back then it was just a research lab. It sold for more than General Motors. You must be joking. In any case, it was the biggest investment I've ever made. This is the only stock I personally owned, because the opportunity to invest was only available if you bought a large stake.
It was an unjustifiably large block of shares. I had 5% of QuantumScape. I think in 2020 she fell first, but then everyone fell. All those stocks that felt so good overall in 2020 and early 2021 began to fall one by one. After all, most small growth stocks fell precipitously, as Katie Wood found out.
And this is a sign. I wrote an article called "Let the Wild Uproar Begin." I am deeply convinced that language matters . There have only been two occasions in my life when I have made it absolutely clear that I believe the time has come. One of them was on July 15, 2008, when in my quarterly letter I used expressions like “abandon ship” and quoted the old “don’t be brave, run to survive and fight another day,” clearly recommending in the very first paragraph not to take unnecessary risks .
Those who heeded our advice to own certain growth assets should have understood: we were calling for selling everything risky that was not mandatory to hold. And the second was the call: "Let the mad riot begin," which is as clear an announcement as it is possible to make. And it began. 2022, of course, collapsed.
It opened weaker than any year since 1939, the year after I was born. The first six months? By the end of the year, the S&P fell 25%, growth stocks fell 35%, and MAG 7 fell 40%. The bond market had its worst year in history. But in early December, the game changed because of AI. AI is certainly a dramatic development .
Everyone quickly rushed over and started testing it. Me too. I asked him to summarize War and Peace in 12 points and then translate it all into German, and it took seven seconds. That was pretty damn impressive. Only the "Big Seven" (MAG 7) grew. For almost 12 months, MAG 7 doubled, while the rest of the S&P and the broader market continued to decline slightly until October-November 23rd , when they became convinced of the sustainability of the rally and also began to rise.
The influx of chatbots and AI has ruined my wonderful bear market. I still had a "bear" market. This was a drop of well over 20%. But this was not a super bubble burst that would have happened without the huge investment and capital expenditure in AI, without the huge stock market gains associated with MAG 7.
" Animal Instincts" would have been very different. And Keynes, my only hero, points out that the best laid plans go awry. If people decide to lose faith , the market will go to hell. They were just thinking about getting very discouraged. AI changed that. Where are we today? If a bubble, defined as a two standard deviation move, did not quite return to the trend before bouncing.
No, it didn't come back, and by a significant margin. It didn't reach the trend. It would have to fall another 20% to reach the breakeven point. Let's say she's halfway there . We are in the midst of a unique event that has never happened before, and historians love repetition so that they can devise a plan of action based on the assumption that everything is happening, relatively speaking, as usual.
There has never been a second " bubble" that has arisen in this way. I don't think it would have worked at all unless it was a truly grand new idea. AI is developing at a cosmic speed, attracting greater capital investment than ever before in peacetime. This is the real thing. This does not mean that a “bubble” cannot form around AI.
Vice versa. If you look at history, you can see that big " bubbles" are associated with big investment ideas that went too far. It has to be serious, and ideally it has to be obviously serious. Railways are the best example, followed by the Internet. If you see that railways will change the world, then of course you want to invest.
Ordinary people, you will get a huge boost. So all the impulse investment advocates are there too. And you are building, as the joke goes, six tracks between Leeds and Manchester. You barely need one, two would be nice, but everyone is losing money, and they are all being "cleaned out" . This is not to say that railways did not change the world.
Of course, they changed, but precisely because of their obviousness and importance. The Internet: Most people saw that it was quite serious and that it would eventually change the world. Amazon grew sixfold , somehow, in 2000. Although it was a successful idea, it fell by 92%. Check this out. It fell 92% during the crash, then rose again to conquer the world.
This is, to some extent, not exceptional. This is what you should expect. So we have Nvidia, which looks like Amazon squared. Money that dwarfs any other capital program in history. Everyone is clearly aware that this is the most important thing that has ever happened in their lives. And they are right.
That's how it is. That is why the investment program will almost certainly be excessive. And why not ? People remain people. Why wouldn't you invest more than you should in something so big and obvious? This is exactly where you would expect the "bubble" to burst. And you would expect, all else being equal, that Nvidia would be followed down by other giants.
There will be small foreshadowings of peripheral ideas related to this, and they will fall first, but they are not of great importance. Then, when the real action begins, the "big players" will suffer. That's how it all happens. And I'm sure it will be the same this time. You have a knack for concisely delivering your most valuable lessons— sometimes in 15 minutes, sometimes in 10, and sometimes in 20.
I'd love to hear, looking back, about your favorite investing lessons. The most important thing is for a person to maintain a clear mind and understand that the advice they receive has an optimistic tone, and this is quite natural. Large investment companies are simply forced to do so. If only they had the courage to stand by their principles.
There is a tendency to believe that if the government says something and you think it is wrong, then most likely it is right . I just don't agree with that. Governments are huge, complex organizations with thousands of people. To manage such a mechanism requires extremely developed political skills.
And the key to political skill is Keynes's 12th chapter. Never make mistakes alone. They insist that at critical moments, one must look back, take action, prepare, but not pull the plug until everyone else does. This means you can be the right person to see the data. Data — as in the case of my housing bubble.
It's like you're running across a plain, suddenly a rocky mountain rises in front of you, and then it's plain again. You'd have to be completely stupid not to notice this. It's not hard to see, even for Bernanke, who led the Fed at the height of a housing bubble the likes of which had never been seen in American history—a three-sigma event, far worse than any stock market crash, including 1929, in its improbability.
It took Greenspan and Bernanke years of frantic effort to inflate this bubble everywhere. The American housing market used to be famous for swelling in Chicago, bursting in California, swelling in Florida. And so on. Never all at once—until Greenspan and Bernanke reached the peak of this extraordinary three-sigma phenomenon.
Bernanke says, "Oh, the U.S. housing market just reflects the strength of the U.S. economy. The U.S. housing market has never had a significant downturn." Of course, it never had a significant downturn because it never had a major bubble before that. And every big bubble eventually bursts. Why should this be an exception?
Of course, she didn't. It was a perfect, "obedient" bubble that deflated symmetrically, exactly as one who studies bubbles would expect. How is this possible? How is it possible that the chairman of the Fed, who wrote a book about 1929 and drew false conclusions from it—although he was, it should be said, a researcher of 1929—surrounded by statisticians and PhDs, of which there are plenty, could not say: this is a three-sigma event.
They are usually very painful, and everything happened exactly according to the old battle plan, and he denied it. This is part of the profession. This is not a system error. Complex organizations always make mistakes during major turning points, or almost always. You as an individual should not do this.
When you become an institution, unfortunately, you start playing the same political games. As a pension fund employee, you have many career risks. I got calls saying, "Oh, Jeremy, give us more material ." "I know you're right, but the committee is going to fire you." And after a block or two: "Well, Jeremy, it's either you or me, and I'm afraid it's you." When you can identify, at least in the long term, some of the behavioral errors that you see in the market, I'm curious what you think about the big index management movement and the prospects for active management going forward.
I was involved in the introduction of index funds. This idea was almost completely ready in 1971 at the business school, where Dean Liron and I were invited. We were sitting in the back row, and I watched them try to decide whether to invest in the new growth market players , Morgan Guarantee Trust (JP Morgan), or in these small new companies from Boston.
T. Rowe Price were the " growth guys." It's hard to imagine that growth was a new idea, but back then it was. The idea was that it was a zero- sum game, right? We do not manufacture goods in the investment business. Before, we just translated pieces of paper. Now we transfer electrons, we add nothing to the total wealth of society.
Vice versa. Back then, we removed all friction costs, and commissions were 1% of the transaction. So you had painful fees and then another 1% management fee and it all comes out of the game. So if you compare those who watch a poker game while sitting at a bar, they don't pay these commissions. They buy the index cheaply, and you're down there, in a poker game, playing with the best players.
Who do you think is leaving the poker syndicate? The best players or the worst? The worst are eliminated. I can assure you. So the players are becoming very smart. By definition, their bottom line is equal to the market minus the cost of transactions and minus the fees they charge. And the guys at the bar watching you, their total is zero.
No costs. So, they will outnumber you as a group. They will definitely surpass you. The only serious article I wrote in my career for the Journal of Portfolio Management was called: "But you can't fool all the people all the time." which is a Lincoln quote. In '72, I thought we would offer indexation and in a few years it would take over the market.
We sat and waited. Essentially, there was a 30-year stagnation, with almost nothing happening until the early 2000s. Then it started to gain momentum, exploded over the last 25 years and now accounts for more than half of the market. This saved a huge amount of money for investors. It's a brilliant idea, and Jack Bogle was one of my heroes, an incredible man.
Some intellectual problems arise when the indexing ratio approaches 100%. Ultimately, pricing has to happen somehow. You have to find a way to pay a few thousand to good analysts to help evaluate stocks. And I don't know how they're going to solve it. This is above my level of competence. But sometime in the distant future, there may be a small tax on all stocks to pay for the work of 10,000 well- trained analysts to help with valuations.
Having worked with many clients and investment committees for many decades, I would like to hear your thoughts: what advice would you give to someone who is serving as a CIO or is a committee member? Many committees have an almost impossible task. Especially in university foundations, because wealthy alumni who have made large donations want to be on the board of directors.
They are treated with great caution, because just because they are great at making money in private equity, venture capital, or hedge funds doesn't mean they know everything about everything. But this makes life difficult for relatively low-paid salaried professionals. It's incredibly hard work—trying to manage these huge egos.
There is no easy answer to this. Some pension funds have become very professional in addressing these issues and are approaching them in a very intellectual manner, but they are in a small minority. You have to think about it, find best practices to balance all these temptations, and they can afford to be a little more contrarian, a little more value-oriented, and take a little more business risks, because it's not their business.
In the long run, they may be in a better position than purely commercial advisors and investment managers, and some of them are. This is not easy. Most of us have to consider local career risks: whoever gives more money has more votes, which is not always the most rational system, but such is life. Looking at examples of pension funds, endowments, and foundations that are doing well, who would you say is an example of one that is best at overcoming these challenges?
These are sincere, hard-working people who are trying to apply the most intelligent approach to managing a huge pension fund. They make an effort and often achieve decent results. I would be embarrassed to name any names, but one or two of the largest funds are the best. They have the most resources, and they have managed them quite wisely.
Many people know who they are, but I can't say it without offending everyone else. I don't have many career risks, but this question is probably the most career-risky. Jeremy, you worked closely with David Swenson for many years. It would be interesting to hear what you think he did exceptionally well.
He had many advantages. You can be a pioneer in a leading university endowment more easily than most people. The head of the pension fund of a medium-sized company has so many career risks that he doesn't know where the beginning and the end are. The aura of a great university is that you are an intellectual.
You are the one who generates thoughts. You have excellent conditions to be at the forefront. So, this is the context. Secondly, he was perfectly suited to lead this movement. He had many good ideas. He could adopt other people's good ideas no worse than anyone else. He collected the latest and greatest ideas.
When we had a cutting-edge new product, it was already knocking on our door. When a product became popular and successful, it was long gone. So we're used to it. This is a great luxury. He had a huge advantage: once he had a reputation, everyone wanted to work with him, and he could get into funds that others could only dream of— shiny private equity and venture capital funds.
And they are much more stable than general capital management . In private equity and venture capital, assets don't change as quickly. Winners tend to stay winners. Being in the right funds is a much more important factor. And he had the advantage that they themselves sought him out. He could analyze who was good as well as anyone, and they did.
So they had many advantages, were well- adapted to take advantage of them, and they did. Their combination over a long period of time was simply explosive. one or two more individuals. Princeton achieved roughly the same results with similar advantages , but not quite as high. I'm curious what inspired you to write this book.
It happened somewhat ingloriously. One of my colleagues on the GMO board of directors, who was a friend of my co-author, decided to ask the board if we should write a book. It was decided to do this. Edward Chancellor had to keep me in check, he wouldn't let me do too much of this or that, because that would scare the readers away.
The irony is that it sounds like my voice. It sounds like I'm talking because it all started with 1,200 pages of quarterly letters , which were actually written by me, well polished, and ready to go. So, he had 1,200 pages, plus 30-40 hours of taped interviews, plus a few articles that were in circulation.
He had to give it form and make it readable. This is not a difficult read. This isn't listening to Grantham try to explain the profound nature of life and death, something I could have stumbled upon on my own . This is a fairly easy and quick book to read . And, fortunately for the reader, I have been in the investment business since 1964.
In '64, it almost didn't exist. The pension fund business has not yet started. Very few talented people had any reason to go into the stock market. The crash of 1929 wasn't that far away, only 35 years ago. GMO has been around for 49 years. When I started, it was much closer to the day the market crashed.
The real pain wasn't in 1929. It was really 1938. It was much closer. Investing was still a suspicious business. JP Morgan and the not-so- bright son of a well- known family were in serious business, taking the rich out to dinner with a nice bottle of wine and buying them a few shares of Coca-Cola. That's all.
There were no options models. There was no pricing theory . No one thought about asset distribution. It was still waiting to be thought about. This was the most interesting thing for me. thinking about ways to play this game, this monopoly, this complicated thing, and trying to understand how it works and what can help you achieve better results with all those unfair advantages that I mentioned, that we specialized in small caps for years, where we had little competition and life was easy.
You have been devoting a lot of time to your philanthropic work, focused on the environment, for the past few years. would like to hear what you think about some of the parallels in the investment world and what you think is happening with the climate. By the end of the book, I realized that people have some pretty strong biases, and one of them is that we're not very interested in the long term, and the longer the term, the less interested we are.
Secondly, we don't like unpleasant news. We really don't like them. Therefore, we give everything a positive connotation. I believe that optimism is a survival characteristic. I suspect that true pessimists have not thrived as well as true optimists over the past 200,000 years. Natural selection, in addition to strength and speed, also included greater optimism.
The Contrarians apparently survived. You need a quirky contrarian in the tribe. It's helpful to have someone who thinks about what will happen if the crop doesn't produce. What happens if there are no bison, etc., but that's only a small minority, you have to deal with optimistic bias and short-term bias.
This explains a lot about the market. The market is actually an extrapolation of today's conditions. Everyone tells this joke about the market projecting an endless series of dividend payments into the future. No, that's not true. Check the data. The market is extrapolating today's conditions. If you're sitting in 1929, having great profits, and a profit margin one and a half times the norm, do you expect bad times to come ?
No. You assume that a margin of one and a half times the normal will last forever, and that explains the price in July 1929. And then you go back to 1974 , the margin is destroyed, and you have an oil crisis. Of course, the market should expect a wonderful recovery. Absolutely not. The market is trading at seven times earnings, indicating that it does not expect any recovery.
It's fitting that most stocks yield 7, 8, 9, 10% returns. Because that's all you'll get. So the market simply takes the worst and has a low P/E ratio , takes the best and multiplies it by a high P/E. He extrapolates. Keynes again said that extrapolation is a convention that we accept, even though we know from personal experience that this is not the case, because if you all agree to extrapolate, then you are all on the same wavelength.
You don't have to guess what the enemy is going to do. He doesn't need to calculate what you are going to do. You will all jump off the cliff together, and you will not lose your job . How does this affect your view of how people treat the environment? Hatred of long-term prospects and troubles. Think about this in the context of climate change.
I don't want to hear this. Oh God, no. They are always saying bad things about the climate. There can be no lasting deterioration from just burning a few gallons of fuel. This is all completely predictable, programmed. You know what the effect of every part per million of CO2 in the atmosphere really is.
You know what happens if you double that figure. And we are doing just that. Temperatures are rising roughly as predicted 50, 80, and 10 years ago, but people are willing to ignore it. Today's floods and fires won't make my life unbearable tomorrow, unless I live in a fire or flood zone where it's impossible to get insurance this year.
So, it's starting to be felt, but it's just beginning. Then you think about everything else that really matters in the long run. Another factor is toxicity, which destroys our health. We have created a toxic environment and are losing our ability to reproduce. Nobody wants to talk about this. This weekend, I asked AI to explain why the birth rate is falling , and it expertly laid out dozens of ideas, economic and social reasons why people aren't having children like they used to.
Which, of course, we can agree with. Then I asked: Did you miss anything? He found three or four things. Then I pushed him against the wall and asked, " Yeah, what about toxicity?" "Oh yeah, toxicity is a huge problem." And he lays out the whole thing. All data on the decline in sperm count. This is a true horror story.
And he was right. He knew it all along. When he finished, I asked, " Dude, what's going on here?" Everyone tells me how smart you are, but despite your intelligence, even when I press you, what have you missed? You don't publish something that you later recognize as important. He gave a very clear explanation in five or six paragraphs that yes, you are right.
Of course, we're only talking about what's on the radar. If people ignore it, we ignore it too. That's all. So, AI will only tell you what is mainstream. The weighting system means that the more people talk about it, the more serious it is considered and the bigger role it plays. That's how you get to the top of the old Google list and that's how you get to the top of the AI list.
And if you have a controversial idea, they become uncomfortable. When I present him with contradictory ideas, every paragraph says, " Yes, but you understand that this is not generally accepted ." You realize this over and over again, to the extent that a machine can feel discomfort . He seems uncomfortable with the conflicting views and the topic of toxicity.
It is recognized that this is developing faster and more dangerous than climate change, that at such a rate the system will collapse due to a lack of new people. Did you know that the 20-year-old group in Japan is 50% of what it was in 1948 ? 50%. Then China's birth rate just dropped below one, meaning that every young person has four grandparents to support .
In South Korea, this figure is 0.7, which means that every young person has to support five and a half elderly people who need expensive care. So, you understand that these systems are going bankrupt, that South Korea will not be able to be a viable political entity in 40-50 years. This is impossible if young people go, say, to the USA, where the situation is better; They make the best countries a little better and the bad ones a lot worse, so they have to pass travel ban laws very quickly .
Do you think it's worth using your philanthropic work to change the direction of these trajectories? The foundation does this in two ways: we support the most dedicated people in this field with grants, and it's nice to note that by the end of the year we could reach a billion dollars in total grants.
Then, through our portfolio, we try to back that up with investments in green technologies where it will make an amazing difference if it works . The more important an idea is, the more points it gets from us. The riskier the idea, the more points it gets from us. We want to do things that in a purely capitalist world might fail, although if they succeeded, it would make a huge difference.
It just won't make you any money in the early stages. Ideally. So we do this, we've made 120 investments ourselves, and many of them fail. The vast majority will fail. But one or two of them, if they worked, would change everything. A cheap, limitless source of green energy would change everything .
Some form of geothermal energy or fusion would change everything . One or two other ideas that increase energy efficiency so that less is lost in the process. Efficient removal of CO2 from the atmosphere. If it could be done cheaply enough, you could fly on separate planes and charge the cost of the extraction per ticket, if it were practically cheap.
There are chances that this will happen. And we want to support them. Since you summarized everything you saw in the investment landscape, both what you did at GMO and the external client work at your family fund, I'm curious how you decided to execute the investment strategy for the fund. Maybe this is a painful question.
Maybe we made a mistake. We decided to invest heavily in new ideas in the early stages that could propel us forward if we were lucky. If one of the 50 or 100 projects takes off and really makes a difference , it might be worth it. Alternatively, we could invest in super-profit venture capital. And we have invested a significant portion of our portfolio in this.
We call it " the best of the best." And this "best of the rest" yielded an average of 19% profitability. Three years ago, before the current turmoil and the green venture business, we were number zero in the Cambridge Associates database, which is their code for number one . Over a 10-year period, we went to Harvard, Yale, and Princeton with our portfolio.
Now, of course, our annual results are close to their lowest. The 10- year figure is still acceptable, and many are likely to fail given the level of assistance from the administration. I think we'll last at least two or three more bad years. How did you assess the risk-reward ratio, especially with respect to super VC and non-green projects, compared to everything you know about public markets as a theorist?
Venture capital, being the riskiest and having the largest distribution of returns, must have the highest returns to attract enough funds. Cambridge Associates would say: look at the data, it seems to show a larger gap between the top 10% and the bottom 10%, but the returns are higher. So, that's good.
I can handle volatility. I have no career risks . I just want the best return. The best return in the long term is probably well- chosen venture capital. Theoretically, that's how it should be. It seems that's how it is in real life. There is some error here. This may not be entirely accurate, but at least approximately, and perhaps completely correct.
This is something I worry about, but I think it's the right way to go . And ultimately, you have to make that choice. It's not the end of the world if I'm wrong. Jeremy, I want to ask you some interesting closing questions, and then we'll wrap up. Before we move on to closing questions, I want to tell you about one of our strategic investments.
We've done a few of these, and each one is working on a product or service that we think will be valuable to our community. One of them is Oldwell Labs, or Owl. Owl is the best software I've seen for asset allocators to find and track managers, and I've seen a lot of them. Trust me, it's worth it. There are links in the release notes, so you can learn more.
And here are the final questions. What is your favorite hobby or activity outside of work and family? Now I like to play doubles tennis with friends. Life is too short to play with people just because they can kick the ball over the net. Recently, tennis has been thought to be the best way to promote longevity, partly because of the right atmosphere of camaraderie.
Football is also not bad, but you can't really talk during the game. I played soccer twice on weekends until I started having problems with my hip joints. But you can play tennis on a clay court for a very, very long time. This is a wonderful experience. Besides that, I spend too much time staring at my iPad, reading good books and a little science fiction.
I'm starting to spend too much time, perhaps, talking to Claude and Deepse where they disagree. Who are the two people who have had the biggest influence on your professional life? I am struck by the process of writing this book, realizing how much, to some extent, I have been " washed"—or perhaps we all have been— by the people who raise us, that I am like my grandfather's little creature.
These are not things I have a choice about. I don't think I have a real choice with that menu joke. I have to look at the menu and take the prices into account. I should feel disgusted by overly luxurious, senseless spending. This is not a choice. This is not some well-thought-out value-based reaction to morality or anything like that.
It just is. My grandfather is an easy choice. And as for the second, I remember a hero like Jack Bogle. This is easy , but I can't think of a worthy candidate for second place. Maybe I could handle it if I had a week to think about it. What annoys you the most ? I have many things that annoy me. Yes.
What annoys me most is people's unwillingness to see the world as it is . They want to distort it the way they like. If people insist on pointing out mistakes, they assume that they have some malicious intent. I am annoyed, yes, by climate change denial. If Claude and the guys tell you that climate is serious, that toxicity is serious, and they give you all the references, that's a good sign that it might be true.
Regarding climate, we have the opportunity to communicate with the stars of this matter and many ordinary experts . This is not the kind of discussion the world is having. You won't find climate deniers all over the world. You'll find a few in England, all of them far-right libertarians, and a small army in the US, but that's about it.
This is a uniquely American thing— climate change denial. It's a bit like a " flat earth society." What should you do? What about investments? Your biggest complaint is about investments. My biggest complaint is that Greenspan and Larry Summers get away with everything . I call them " Teflon people." My heart sank when new presidents, in whom I had high hopes, reappointed them, even though they had just led the financial system during the crash.
To better understand this: Greenspan, Summers, and Levitt of the Securities and Exchange Commission declared war on the CFTC, which was trying to regulate mortgage derivatives. Each of them called Brooksley Bourne, who was the head—a woman with nerves of steel and principles. They pressured her, saying, “What are you even talking about?
The financial industry knows best what is in its interests. If it's dangerous, they won't do such dangerous things." I'm not kidding. That was the argument they used. When she sent them to hell, they went to Congress and got the law changed. They were so adamant that banks should not be restricted in this area.
So that we don't have to worry that mortgage instruments are too risky and designed to make money for the wrong people at the expense of ordinary homeowners . What a price we paid. It almost brought the entire financial system to its knees because of this crazy idea that banks would be so smart by nature that they would behave well.
And, of course, they behaved badly. However, Greenspan was knighted, while Summers continued to insult other people for other reasons. But he was appointed everywhere . Levite is the only one who admitted that he had made a big mistake. So we'll give him credit. But this phenomenon of " Teflon people" is a terrible thing.
This is my main complaint. Jeremy, last question. If the next five years were a chapter of your life, what would that chapter be about? An attempt to promote, popularize the importance of combating climate change, toxicity, and essentially a long-term, smart way of managing the planet. Capitalism will either change or we will cease to exist as a successful species.
Changing capitalism will take a long time and a lot of effort, and it will be the greatest achievement of humanity if we can do it. We need to arrive, say, by 2022, at a society where raising 2.1 healthy and educated children is truly valued. Clean air, clean water, and fertile soil —all of this is important, possible, and quite real.
But the most difficult thing is to change attitudes from consumption and personal success at any cost to a society that is sustainable, cohesive, supportive of each other, and values family . Well, Jeremy, thank you so much for sharing your wisdom. We appreciate it very much . It was nice to chat.
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