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Please stay tuned for important information at the end of this episode. Hello and welcome to the long-term review. I'm Amy Arnott, a portfolio strategist at Morning Star. Today on the podcast, we're pleased to welcome Jeremy Grantham back to discuss his book, "Creating a Forever Bear: The Perils of Long-Term Investing in a Short-Term World," which he co-authored with Edward Chancellor .
Jeremy is a long-term investment strategist at his eponymous firm Grantham Mayo Van Otterloo and Company, or GMO, which he founded in 1977. He is a member of the asset allocation committee and the board of directors of GMO. Before GMO, Jeremy was a co-founder of Battery March Financial Management, and before that, an economist at Royal Dutch Shell.
He earned a bachelor's degree from the University of Sheffield and a master's degree in business administration from Harvard University. Jeremy is a Fellow of the Academy of Arts and Sciences, holds an OBE, and is a recipient of the Carnegie Medal for Philanthropy. In 1997, he and his family founded the Granthm Environmental Foundation, which supports research and action to combat climate change.
Jeremy, welcome back to Long View. It's nice to be here. Thank you very much for joining us today. In the book The Making of the Eternal Bear, it is noted that you have always had a severe writing crisis , and you had difficulty with school essays and quarterly letters to shareholders. And I'm curious what your process was like writing this book and whether it was easier.
Well, Edward Chancellor is a professional writer, author of some really good best-selling books on financial topics, and he's a friend, and he worked with me at GMO for six or seven years. And, um, one of our board members had the brilliant idea that they should write a book about me. And, um, I knew from my history of laziness or writer's block , depending on how polite you want to be, that this would n't get done.
And so I happily agreed. And the day he accepted the project, the next day he received something like 1,200 pages of quarterly letters over 20 years. And, uh, to say that me and eight other people didn't work hard would be completely wrong. We tried really hard, rewriting and rewriting it, and then dealing with punctuation and phrasing, and it was a huge effort to make it of a good enough quality.
So he started with 1,200 pages, probably much more polished than a typical book. Uh -huh. And full charts and so on, and every bright idea about finance I've ever had , I think, and then he did 25 hours of interviews that suited me. Quite a few of them in person, and the rest on Zoom . Then he read everything that was written about me or by me, meaning "by me" was quite short, but not much.
And then he had to put it all together , and, uh, he decided what the overall theme would be and what would go into it. Uh -huh. And I had to decide what would come out of it. So I had a kind of veto power. Good. But I didn't have the veto power to include it. I only had the veto power to remove it.
So, that was the format. Yes, yes . And in the end, it turned out to be much more work than he thought. This was the first time he had engaged in such a joint venture. Yes, yes . And he would sometimes gently nudge me toward fixed income, which I mostly stayed away from, so I tried to keep that to a minimum, and he would usually nudge me away from non- financial things.
So my quarterly letters really did something important. I was happy to point out what I thought were the flaws in capitalism, both in the financial model and in economists, especially financially oriented economists, and in inequality and things like that, and just the blind disregard of capitalism and the economic industry for things that mattered to me: resource depletion, climate change, and toxicity.
And, well, he tried to keep... By the way, I've spent the last 15 years mostly on this topic... Long-term threats to society, and therefore to the economy. And the only thing I've kept financially for those 15 years is, uh, the ups and downs of the big bubbles, because that's always been my hobby/specialty for 40 years, and Edwards' specialty is the wonderful book " Devil Take the Heindmost" which has been published in 24 different languages, etc.
And, uh, we were both glad there were bubbles. And I always insisted that there should be more about demographic decline, infertility, etc. And he insisted that I do relatively little, because he understands quite correctly, as I do, that the financial world is not very interested in anything long-term and unpleasant, and, uh, it's very difficult to get their attention even on those topics.
And, oddly enough, I feel like it's my duty, so for 15 years I've been squeezing the little details of climate change into the general financial conversation, and, uh, hopefully someday I'll get a reward from someone, because in real time I definitely haven't. There was quite a bit of eye rolling. You should have seen this 25 years ago about climate change.
What is this guy talking about? And then, uh, 15 years ago we started looking at resource scarcity and that it was much more economical. So it worked pretty well. And then, uh, starting six or seven years ago, we got into toxicity, and it really hit rock bottom. Nobody wanted to hear it. Well, so, I think the book has a pretty broad scope.
You know, there's a section at the end that goes into a lot of the issues you just mentioned, but it's also a really fascinating story of your career and journey in the world of investing. And you often cited your Yorkshire and Quaker upbringing as key to your approach. And I'm curious to what extent do you think your value investing mentality comes from that environment of, you know, frugality and so on?
The honest answer is that it is impossible to know for sure. There is no controlled experiment. I've only gone one way, and, uh, it's in my cerebral cortex that waste is a terrible thing. And, uh, I was on a podcast recently, and the guy honestly couldn't believe that when I see a menu, I seriously consider what's a good deal and what's overpriced, and whether I can afford the wine, and so on.
And I was shocked that he wouldn't believe it, because as far as I know, we're a small group, maybe 10%, maybe 20. It doesn't matter how much money you have in your piggy bank, you still want a good deal when you're at a restaurant, or a store, or somewhere else. So, it's programmed into me. But I grew up during World War II, and everything was extremely scarce, right?
Everyone wore socks because they couldn't afford new ones, etc. Everyone passed their clothes from one child to the next, which was a bit difficult in my case since I had three older sisters. So yes, we were all frugal for a while . By the time I was seven , ahem, I didn't need to be in Yorkshire, which is much more frugal than average, or for my grandfather to be raised a Quaker.
And he raised me because my father was at war and then died in Egypt. And your father died when you were quite young. Yes, I don't remember meeting him. I think it said I dated when I was almost two years old, but I don't remember. So I was so caught up in the bargains and the values that, to be honest , it was hard for me to, you know, take seriously what other valuation managers were making a fuss about.
I mean, Graham and Dodd to me are kind of ...er, you've got to be kidding. Do you think this is worth writing about? You know, more assets are better than fewer assets per dollar of stock price. And it's better to have more profit than less, and it's better to have less debt, because it seems so obvious, so absolutely obvious, that they asked me to give the Ben Graham talk at Columbia one year.
I think they call it a " breakfast speech ." And, um, I started with the words: "Friends, Romans, lend me your ears." I came to tease Ben Graham, not praise him. And, and, here's what I did. Part of these teases was comparing him to Keynes, who is my hero. And Kane was a deep behaviorist in the stock market.
And, um , he was impressed by career risk and how you minimize it. Never make a mistake alone, which means you never fight the bubble, because it can be deadly. You fall off the cliff with everyone else, because it's never fatal. You can shamefully ignore the bubble because almost everyone has been caught in a major financial crisis.
The Queen of England said, "Why didn't anyone predict this?", which really annoyed us, as we had been predicting this for several years and had written that it was like watching a train wreck in slow motion . Right. And I think it was actually at the Morning Star conference in the summer of 2008, when you were very, very bearish at that point.
July 15th, but who's counting? Well, I wrote an article that basically said, "Abandon ship." I've only done two of these in my career. It was one. I did dozens that showed that the market seems overvalued by historical standards. This is almost typical of the last 25 years, because the market has been, frankly, overvalued by historical standards for most of that time.
But I only said twice that now is the time to move in this direction. And the other was, uh, January 15, 2022, when a whole series of quite specific indicators showed very, very rare figures. 1929, 1972-Nifty50, 2000-tech bubble and 2021. Mmm. And I said, "Let the crazy noise begin," which was the title of the quarterly letter.
And you can't say it any clearer. So, here are my two, now is the time. People interpreted my reassessment of the market as a promise that it was about to collapse, which is complete nonsense. But they like doing it. And as I like to deny, if I think it's now, I can definitely tell I'm serious because I say something like, " Don't be bold." Run away.
Live to fight again." You know, abandon ship, so keep her to yourself. All of this was in that letter dated July 15. And then I like to add, and I have two on the other side, which, um, two is a lot for a bear. But, uh, we posted reinvestment when we were scared on the day the market hit its low. This was one of only two short articles I published online that weren't quarterly letters.
And, uh, reinvestment was scared. The S&P was 666. It was up more than 10 times. And it said that, of course, you are paralyzed. Unless you are paralyzed, you don't understand what is happening. You know, the global banking system is on the verge of complete collapse. Uh, but the market is cheaper than it has been in the last 22 years.
According to our famous or infamous 7-year forecast, we have 12% per year for the S&P and similarly large numbers for most other stock markets. So make a plan, pass it on to your management, and start getting back into the market. And the other one was, um, in the summer of '82. It was a serious market low, eight times the profit, eight times the depressed profit.
And, um, we got to Wall Street, which is now dead, but it seems the Wall Street Letter was the genesis of the Wall Street Journal. And, um, it was just a weekly, biweekly, gossip newsletter, and inside was my first, um, serious quote. And there I was quoted as saying that, in my opinion, the US market is close to unprecedented growth in both the stock and bond markets, and you, they are two.
So, I'm two and two. Just between them, I'm 955 in a market that is generally overvalued, and the reason for that is pretty obvious. The market never sold stocks for more than 21 times the profit it made in 1929, and it never exceeded that again until late 1997. And then, starting in 1997, it almost never drops below 21x.
Especially if you do the profit calculation the way it was in 1929, i.e. actual real profit, including everything, and properly depreciated, not just what is considered profit today , i.e. if it's unpleasant, we skip it. Right? If it's good, we're exaggerating. I think you would have been imprisoned almost any time before 1975 trying to avoid punishment for the kind of income statements they make today.
Well, I'd like to talk a little bit about the current market environment. In the book, you wrote that as of February 2025, the long-term outlook for the broad market looks as bad as almost any other time in history. Is that still your opinion now? That's exactly my opinion. In other words, it is surprisingly higher than it was at the beginning of the 25th.
At the beginning of 2025, I was like, "Well, the good news is that you don't have to worry too much about my bearishness because, uh, the rest of the global stock market is pretty cheap, and some of them seem really cheap." And I gave the example of Japan, European value, and emerging markets, and they all grew much more than the US.
So yes, the US grew by 25.67%, which is a heroic performance in these 18 months. Starting from one of the highest levels in history, they manage to grow by another 27% thanks to artificial intelligence. But the rest of the market rose much more, by 10-30 points more. Developing countries are 30 points higher, and Japan is about 15 or 20.
European values are maybe 15, but that's a good overshoot . So I don't feel too bad about it . Ultimately, you shouldn't be judged by what you don't have. You should be valued for what you possess. And GMO has what you call a bubble detector, which measures the percentage of stocks that have underperformed the overall market over the previous 12 months.
So, he looks at how narrow the market return is. And I'm curious what the current figures are for this. Well, since I don't run it, I can't tell you anything, except that I know our guys in the office tell me that it's, um, very attractive. In other words, it sends a good signal. But I cannot comment on the details and magnitudes .
My, um, equivalent of this is that we define what a bubble is that is two standard deviations away from the trend. We study what's happening with them , and we found, um, 26 in the major stock markets across all the data we've been able to gather, usually since 1925, sometimes a little shorter or longer, and we found that 26 of them have reverted to their previous trend.
There were no exceptions. And there were one or two glorious painful leaps upward when they didn't stop at two standard deviations, but reached three or more, like in Japan. Japan in 1989 is the mother of all stock bubbles, achieving a 65-fold increase in profits. I like to say that unless a cost manager wakes up screaming in the middle of the night thinking about it from time to time , he doesn't understand its importance.
This tells you that there really is no advantage to how crazy a bull market can be. On the other hand, the result is that the higher he climbs, the longer and more painful the fall. And people say, “Oh, you were wrong. You said it would fall four years ago, 3 2 1» . That's not quite the point. Historically, Japan has grown and grown and grown.
We got out. We had no Japanese at all , and it was 45% of the benchmark, and we had zero. We considered it fiduciaryly irresponsible, and we watched it go from 45 times earnings growth to 65. It was brutally painful. It was more painful than being a bear in a tech bubble. That was 10 points a year for three years.
In the tech bubble, we were lagging behind our benchmarks by six or six and a half percent a year for two and a half years. But since the tech bubble was in the US, our committees were extremely excited and eager to fire you for lagging behind. Whereas before this was happening in Japan, and not many people had, um, a foreign portfolio.
And the foreign portfolios were doing so well that we were winning. We just weren't winning by 14 points. We won by four points. But no one fired us. No client fired us for lagging 10 points in three years because we were so lucky to be in foreign exchange, foreign assets were doing so well , and, um, most of our clients were completely new to this asset class.
So they compared it to a world where they didn't make such a bold bet, and they won. But the penalty in Japan for a 65x earnings multiple was that you didn't just go down for one or three years, like during the tech bubble of 2000, 2001, 2002 . It was something like a monster. You were falling for a lost decade, and then maybe even a lost 20 years.
You fell, fell, fell, fell until finally the Japanese market became cheap enough again , and we recommend it, and have done so for the past few years. So in the US, GMOs have been known to maintain their value discipline during market bubbles, even if it resulted in a loss of customers. And I'm curious, how did you manage this tension between business risk or career risk and investment integrity?
We actually failed to do that. Um, we were, I guess you could say, idealistic or naive, whatever you want . We thought it was the right thing to do at the time . Ultimately, I realized that if you're a big firm with shareholders and all these good things, you can't fight a bull market. Keynes was right.
He hit the target. You've never heard of Goldman Sachs, JP Morgan, Morgan Stanley, those big guys. You've never heard them tell you to get out of the market, and you never will . It would be a crazy business for them, but they won't do it. It's like no one gets fired for buying IBM, right? The same.
And the only one who really put it into words was Mr. Prince from the City, when he said, "If there's music playing, you should dance." And I'm still dancing. All these words have the same meaning. This is such a game. Music is playing , you are dancing. The shares are rising, you recommend them. And everyone is lining up to tell you to buy the craziest IPO in human history.
In 50 years, they'll be telling and writing stories about SpaceX, and quoting you excerpts from the prospectus, and you'll be laughing at it. There is a very funny podcast where he talks about some things and highlights the ones that are even crazier than the rest . This is certainly a very optimistic document about market potential.
Well, it's much more than just poverty. I mean , 1.7 trillion for a company that is making losses, when 90% of the forecasts are focused on the artificial intelligence of their currently third-rate offering, then who are Anthropic, Open AI, etc. pushing? It's just incredible, and the scale is amazing, and the fact that, you know, JP Morgan and others are all lining up to strongly recommend this to their clients.
And of course there will be a huge excess of buyers over sellers intentionally because, first of all, NASDAQ cheated and changed the laws of the land so they could squeeze this into the NASDAQ index despite the fact that it doesn't make a profit, etc., etc., etc. And that means there will be a lot of people who will have to buy this for any NASDAQ index.
So, demand will be much greater than sellers. So, given supply and demand, it's hard to imagine that the price won't increase, and perhaps it will increase significantly; and eventually, the reality will come out, and that will certainly be one of the historical events that I so appreciate in history, looking back.
By the way, it will be amazing if this doesn't collapse, because such large-scale AI developments will be needed that our whole life will become completely different. So, if the price is right, we live in a strange world, and we're lucky we're not being commanded by our, ahem, robot friends. And, um, if there's a much higher chance of a collapse in either direction, it would be historically notable, and I'd bet at least 90% on the second option, but the first would be terrible enough for them to justify their price tag, and an almost chronic lack of control .
You know, it's like producing drugs and not having testing programs for them. Just get them to market as quickly as possible. There are no equivalent restrictions on AI. Much more dangerous than any drug. And drugs can be quite dangerous. But this one , this one, this one can change our lives in the most unpleasant way.
And you have very rich, very smart people who are obviously saying things about improving productivity that I don't think understand the laws of physics. You know, it all depends on energy. Everything is made from raw materials. Every living thing must eat. This is what matters. If you want to survive in cold temperatures, you need to keep warm and dressed, right?
You can't create something from nothing. You can have all the brain cells in the world , but you can't create something from nothing. I like it. And here we are, uh , promising. I mean, some people say it's going to be 10%20% productivity per year. I mean, they have no idea what they're talking about.
Most space travel and other things that are considered in the future are considered by most serious physicists etc. to be completely unthinkable, and not just for 10 years, but almost indefinitely, and also the energy costs of getting anywhere, uh, the radiation hazard even through a thick spacecraft, the radiation hazard of living on the Moon or Mars.
You will have to live deep underground. How to produce food? This goes on and on. And where are the people who can't live on the simplest, most fertile planet , perhaps for many galaxies around, if not everywhere. And, uh, and we have n't even managed to build a dome that can support a complex agricultural system yet .
They always broke. If we can't do it, why do we think we can do it on Mars, which is almost infinitely less friendly? You would think they would at least decide to prove that it's possible to live in a dome in a controlled, relatively safe environment on Earth before they, uh, try it. Well, they don't try.
They just talk about it. So, does all this hype around SpaceX and all the AI-related stocks remind you of the market situation in 1999, or do you see any differences? It reminds me of that fabulous idea of the Sassy Bubble, where a company went public, raised money, and said, "Um, this is a hugely valuable company, but you can't disclose what it does right now, and they raised a lot of money and sold it off, as they deserved to be sold off." M probably won't be able to sell off a significant portion of the $1.7 trillion, but he might be tempted if he could.
So I'd like to take a moment to talk about your career, how you got started as an investor, and what you learned along the way. You write in the book about going through a bit of a speculative phase early in your career. What went wrong with deals like American Raceways and Market Monitor? What did you learn from them?
There were two things. One, they were bought on a whim, you know, to the moon, to the moon. Everything I bought went up in price, and I thought I genius, and, uh, I wanted to make a fortune so I could come back to England in a few years and be rich and happy. And secondly , the two ideas that destroyed me were great, really good ideas, but they were decades ahead of their time.
The first was to try to bring Formula One Grand Prix racing to America. You know, the blood, the power, the noise. It's really American, when you think about it. Why wouldn't that be a success? And of course it was. And the Miami Grand Prix is on an international circuit, and everyone's perfectly happy.
But they didn't want that at the time. They wanted to race around the circuit exclusively in cars that looked like the ones they drove at the weekend. And they didn't like the idea of change. And so after one spectacularly well- attended race, which we thought was a fortune, and they thought it was interesting, but what the hell, it wasn't that exciting anyway, and, uh, they went bankrupt.
And then another company was going to put a monitor on every broker's desk where you could see the prices. Can you imagine that? Something like Bloomberg. It's 1969, and technically you could have a simple box in 1969 that could give you the price of options on individual stocks. And if you had a real demand, it would be a brilliant idea.
But there was no demand , because nobody really understood it, and there weren't that many boxes, and why would I pay for a box if there's no demand? So it just died. And you know, 30 years later, of course, they're happily trading options on their box because... Um ... on some console. It was just, um, 40 years earlier in the first case at least, and 20 or 30 years earlier in the second case.
So that's another lesson. It's not enough to be a great idea . It also has to be practical in the short term, otherwise you'll run out of money. You also came to the conclusion pretty early on that investing is a zero-return game after expenses. And your argument for indexing wasn't necessarily based on an efficient market, but rather on math and costs.
And I'm curious what led you to that realization. It wasn't based on market efficiency at all, by the way, because we were strongly opposed to that concept. And when we recommended the idea of indexing at our firm, Battery March, we were both Dick Mayo and I, running a portfolio of stocks, picking stocks, and going down.
We had been significantly outperforming the market by six points a year for eight years, and only one year of decline was a bad year. So, um, we didn't have a problem. There were two arguments for indexing that are quite sufficient. One of them is market efficiency. If that's the case, then you should index.
Of course, it was far from efficient. It was almost hysterically inefficient. And to prove it after eight years of average growth in 6%, the first nine years GMO stocks were up an average of eight points a year. Um, you can't do that in an efficient market. And bubbles don't form in an efficient market.
And Shiller, who eventually got a well-deserved Nobel Prize, uh , almost 30 years ago, proved that the market was 17 times more volatile than if you actually knew the trajectory of earnings and dividends going back to 1925. Because the trajectory of earnings, if you actually discounted it, would mean that the market would have bored every stockbroker to death.
And, uh, it's not, it's certainly hysterical in comparison. It jumps from bull to bear, and, uh, it makes the whole thing much more interesting. And, of course, uh, the investment world makes a lot more money in a world where you're dealing with hysterical investors who overreact than if they were serious and followed the trajectory of the discounted dividend stream.
And the zero-sum game is another argument for the index. If that's a truism, then it cost everyone at the poker table 2 % a year back then. Each trade cost 1%. The management fee was 1% if you were lucky. So the slippage for the game was huge. And the indexes stand at the bar and watch the game. And because they don't do anything but the initial purchase, they sit in their portfolio and they get paid five or ten basis points, and the other guys' sum is minus two.
It doesn't matter how good they are, even if they're Warren Buffett and so on, trading against each other, it's going to be minus two. So the zero-sum game was all you had to believe in to know that most people, most big pension funds should, uh, index and leave the fight. for lively small firms like ours, it was back in 1971 when we offered indexing.
And we didn't get any business for a few years. So that was around 1973 , but a few years before Vanguard opened up its index file. And I'm glad to say that Jack Bogle mentions this in his little red book, the little red book of the head, like Mao. And of course I'm a big fan of Jack Bogle because he probably saved trillions of dollars for, uh, average investors.
So in addition to indexing on Battery March , you also focused on small forgotten stocks. Yeah. What inefficiencies did you see there that the rest of the market ignored? I think it was back in the early 1970s when you were kind of banging on the table to find small- cap stocks. Well, first of all, we built a database of small-cap and large- cap stocks, and there wasn't a single one existed.
Uh , there were some indices that went back to the middle of the time, but none of them were small caps. And, uh , we found that small caps had these 5-10-15-year ups and downs, and they changed their path, as it turned out after the depression. They went up. They went up three steps and down two, and up seven steps and down six.
But they went up steadily. And we had this data, and we had these ebbs and flows, above all. And if you could go back six, seven, eight years in a row, you wanted to study that cycle a little bit . And it turned out that when we finished , it was clear that we were deep into the large cap cycle. Indeed, it was the Nifty50, when everyone thought that you shouldn't respect IBM, Kodak and Coca-Cola, find the one that really survived, and that, uh, that was a dirty game.
We were professionals, and everyone else who owned our stock was actually cousins of the founder. These little regional businesses, Twin Disc Clutch, Great Lakes, Stock and Dredge. I mean Hartford Steam Boiler Insurance and Inspection Company, and the only company I ever saw that did n't have a footnote in its annual report one year.
Is that a world record? I ask. Anyway, the locals didn't know how to invest . They just held the stock for a long time, and sometimes when they needed money, they'd sell a few shares, and we'd look at it, talk to the boss. The boss didn't have, uh, any restrictions. They just talked to you back then and told you what was going well and what wasn't, what they were trying to do and what the chances were of getting there.
So we had what would be terrible inside information today, and we were trading against amateurs on a regular basis. So it was a little unfair, a little in those first 20 or 30 years, a little It's like taking candy from babies. Um, but it was great for us, and it was still exciting, and a lot of interesting small companies, and something like 80% of our purchases were outperforming the S&P because we had such a tailwind from all of these factors.
Do you think there's still opportunity in small-cap stocks, even, you know, in the era of regulation and much better access to information? Well, if you watch the cycle and you find at the end of the long term that they're chronically undervalued , um, back in '74 they were about half the price of the big guys.
So we thought we had about 100 percentage points of upside going from 50 to 100. And, uh, we outperformed . Everybody outperformed because they beat expectations. Unexpectedly, the earnings of these small guys were better than 50/50, by about 15 or 20 points. So we actually won by about 115%. Stretched out over a fairly long period of time.
So you only needed one idea, and it would sustain you for a decade. And that's another lesson I've learned in life. I've been quoted as saying that one or two good ideas a year is enough . But that's not enough. You know, one good idea every two years is enough. Uh , you just have to make sure that the idea works on a fairly broad level.
And, um, I think they were often accessible and sometimes more complex than others. So how do you know when something is really a good idea or a great idea? Well, I'll just admit that it's a lot cheaper, and if I buy it and hold it forever, and if it's cheaper, I'll make more money. And that turns out to be a mathematical fact.
But in the short term, a stock in a company that has no value, like meme stocks, can outperform others and go up 20x. It doesn't change the long-term value, and eventually it will go down again. There is a rare exception to that. Um, Mr. Musk is very good at doing this, which is: you inflate the price of the stock to five or six times the fair value of a really decent model, and then you sell a lot of shares.
And you're so good at propaganda that instead of the price falling because of the illusion, it doesn't fall; and very quickly it gets back up to a multiple of the fair value, and then you sell some more, and you reinvest in some really giant factories, megafactories, gigafactories, and, um, you turn the belief and the confidence into real value.
It's always been theoretically possible. Very, very few people have ever held it up for more than a short time. And Musk has been, um, probably the best exponent of that in history so far. So even if the price increases in some way driven by the greater fool theory, he was still able to collect those profits and reinvest them into something tangible and turn the greater fool theory into real life.
So, hmm, you could argue that in his particular case, it wasn't even the greater fool theory. and one or two people credited him with that skill so much that they invested correctly. Of course, there are a lot of people who are talking the same game in the short term, and they get a lot of people to invest in them, but those a lot of people are showing shockingly poor results, and you don't hear much from them .
So the cohort that invested in Musk was right. The hundred cohorts that invested in the other 100 companies were wrong. And as they say in this industry, it's better to be lucky than to be successful. And I'm not saying that some of them didn't do it because they were just smarter than the rest of us.
I'm pretty sure they did. And good luck to them. Well done . But mostly it's, uh, the one in a hundred where nonsense actually, uh, turns into solid money through a well- programmed, sustained effort that's so unlikely, and yet it's happened. Can they do it with the $1.7 trillion hype around, uh, AI.
Let's just say, if AI really is so good that $ 1.7 trillion is cheap, and AI is so powerful that our lives are clearly under very serious threat, I wouldn't wish that on our species at all. So we have to wish it was hype, because if it wasn't, it's a lot worse. For those of you who are wary of hype and valuation issues in stocks, are there any other asset classes that look attractive to you right now?
Almost everything looks more attractive than the U.S. stock market. Foreign stocks are probably a little overvalued even by 21st century standards, um, and very overvalued by 20th century standards, but not as bad as American ones. So if you have to, if you feel like scratching your head at stocks, I would take them and then diversify them as much as possible in this program.
Do you have any fixed income? Well, you know, some 30-year bonds. If you had some gold, I'm not an expert, but that's a whole other story. If you have commodity stocks, they have a negative correlation over a 10- year horizon, which is extremely valuable. So things like that, which are very different, would make a decent portfolio today.
You probably won't lose your shirt. You might lose a little bit of money over 10 years, but you won't lose your shirt. You wrote in the book about how markets tend to over- extrapolate both good and bad outcomes. Have there been other times when you've found the market to be overly pessimistic? Yes, broadly the common belief is that the market extrapolates, the common belief is that it predicts the future, but it doesn't just extrapolate from today's conditions.
So if you ask the question, the US bombs Iran and as a result the Strait of Hormuz blocks 20% of the oil slick. If you think that advanced the economic future of the world, you're probably smoking weed. I think you'd agree. It's clearly associated with all sorts of risks, the oil freeze , and you're really playing with fire, and so on.
And yet the market goes up and everyone says, "Oh, this is shocking." Uh, and I say absolutely not. That's how the market works. If during this period, let me ask you one question. Are earnings going pretty well? Yes, they are. So the market goes up. It's simple. They're waiting for something to happen, they don't realize that bad things are going to happen because we're not doing very well.
In the aggregate market, we say that if you give me a higher rate profits, and inflation doesn't go up too fast, the market will go up. You can explain the P /E ratio of the market. Banker and I built a model over 25 years ago with some crazy correlation coefficient, like 0.9, very high, suspiciously high explanatory power, so high that I wouldn't believe it if we didn't.
But it goes back to 1925, and it said, how do you explain the level of the market? And the current market is explained by rates of profit, inflation, and stable GDP, not high growth. They don't like high growth; high growth is too volatile and dangerous. Portfolio managers like stable GDP growth, so plus two and a half, two and a half is more valuable to them than, you know, plus six, minus two, plus eight, minus...
Even if the average of that might be a little higher, they prefer two and a half, two and a half. In any case, those are three factors, and the stability factor is in a bad third place, and the inflation factor has n't been doing very well recently because people believed so much that it was, um, temporary.
Uh, that's historically exceptional . Whether it's slow and more grueling, we'll see. But I think the market will hate it again in the not-too-distant future. But rates of return ride the waves, and rates of return were incredibly low and came back. I've been saying that if very high abnormally high returns don't attract a lot of capital, then capitalism is broken.
And the truth is, it's been a little broken in the 21st century . The monopoly factor has grown in every industry, and some of it is even extraordinary. And there's nothing better for a shareholder than a monopoly. You set the price, and that characteristic is especially high in mag 7. But those are great profits.
That's bad for GDP. A competitive world like in the 1960s, where if you own chemical companies like we do, damn it was that as soon as they started making money, they all built an additional polypropylene plant and destroyed profitability. So we talked about different types of risks, valuation risk, speculation, and climate and resource constraints.
I'm curious about what gives you the most optimism today, whether in markets, technology, or society, despite some of the long-term risks that we've talked about. Well, I've learned a few things about humanity. First, they love good news. I suspect that pessimists have not been well-adapted over the last few thousand years and have been bred out to some extent , leaving us as an optimistic species that was probably better adapted to survival in the past.
And we do n't... we're not really interested in the long term . Uh, we kind of look into the eye if it's more than a year. It probably took us a painful experience to realize that we need to make some money for the winter. Uh, and that's all we can do. Uh, so that, uh, we, uh, theoretically value our grandchildren.
We play soccer with them on the weekends, help with their tuition, and then we go back to our chemical company and act like we want to kill them. And it always has been that way, and I suspect it always will be. We're being driven into corporate capitalism, as if the fittest survive. If you, uh, increase the power of shareholders, then the players are going to have a big career risk.
That's exactly what they're doing. They're going to keep making toxic chemicals, or dangerous cigarettes, or asbestos, or lead in gasoline. They know very well in each case that it's dangerous. The archives are full of data. But we're not doing that. We're looking for profit maximization and short- termism, so we're not really interested in the long-term factors that are relevant to our survival, including, as it turns out, artificial intelligence, but finite resources.
The only people who think that complex growth is possible on a finite planet , Kenneth Balding said, are the crazy ones and the economists. Economists don't even deal with energy; they think energy is trivial, they think raw materials are trivial, and yet without it, everything stops, as we may find out in the fall due to oil disruptions.
And we are far from living within our means. You know, experts say we need 1.7 planets to be sustainable at current income levels. And if we all turned into rich Americans, we would need four or five planets. And so, in a sense, we begin to drown in the waste products of life – carbon dioxide and other waste.
They create a toxic environment for virtually all life. And we , um, don't argue with the facts. There is no dispute about the facts of climate change, which is actually funny when you look closer. But in the case of toxins, fertility damage, etc., we don't even argue with the data. We just ignore them.
And the positive point is that we have no real chance of success in the long term. For the last 15 years, I have been fixated on the long-term risks to society. That was my job description, and I'm pretty well convinced that the prophets are right. We are losing business, climate change, resources, poisons, toxins.
But the only way out would be if the population were to decline fairly quickly and steadily, so that, say, in the sixth generation, there would be 2 billion of us , not 15, or maybe 1 billion. And, strangely enough , we decided to do this for social and economic reasons, very good reasons. I think that in general families are having fewer children; fewer people are choosing to start families, and many more families are choosing not to have children or to have one child.
In the past, we all had two children and then we decided whether we would have three or four. So it's a striking phenomenon, and it's everywhere. Childbirth rates , childbirth rates in sub- Saharan Africa and sub- Saharan Africa are always considered exceptional. This is absolutely not true. It's just that the number of children per woman has decreased from seven to four.
In fact, it has decreased more than in Europe, where the number of children per woman has decreased, perhaps by one and a half children. And this is a fairly universal phenomenon, and it seems to be accelerating, and as the environment for it normalizes, it's self- reinforcing. So our numbers will be reduced to, uh, a few billion people or less.
So this is a miracle. And if we can combine that with a more or less endless supply of cheap green energy, uh, we might have a ticket to salvation. And, uh, I think we will almost certainly have or be able to have an endless supply of cheap green energy, whether it's fusion, geothermal, or the ever-decreasing prices of solar, wind, and energy storage.
And energy efficiency prices are falling like a stone. They are much better than my first article, where everyone said I was a foolish optimist, extolling the future achievements of wind, solar, and energy storage. And they've all done much better than anyone thought, and they're continuing, and they'll continue, and long-term energy storage will go up in price, and maybe go up again.
So, hmm, they might get fusion one day and just find that it's not economically necessary. But in any case, we have a real chance to have cheap green energy that does not pollute the environment. And, um, we have a real chance of ending up with a lot fewer people. And this combination can lead to, ahem, long-term sustainability.
If you had lots of people and cheap green energy, the fact that it was green wouldn't matter at all. It would just throw us off the cliff much faster because energy would be much cheaper and we would be richer, we would do more and we would pollute the environment more. So, that's my optimistic take on the baby crash.
And, um, what worries me is that in addition to the perfectly reasonable economic and social reasons for smaller families, there is a growing problem of toxicity . And these are endocrine disruptors that affect our hormonal system, do a lot of things. But they reduced our sperm count by about a third, to close to a third of what it was at its peak.
And the number of young couples needing help has grown from zero in 30 years to 17%, and in another 20-25 years the average couple will need help. And it's a very good thing that the population is decreasing. But if it grows at the rate of, say, South Korea...the fertility rate in South Korea is 7, which means if you give birth to one- third, you get one-third of the children needed to replace each generation every 30 years.
So, in 60 years, this will be the 1st generation. In 90 years, this will be the 127th generation. Hmm. It's just a fact. Now that may change. This could increase from 7 to 1.2. But it probably won't be 2.1. So South Korea may have come so far and so fast that in 50 years it is unlikely to be a stable economic system .
So I want the population to decrease, but I don't want it to collapse in such a way that science disappears, society disappears, and people lead miserable existences. It would be nice to return to a more or less controlled state, and in those six generations we will have two simple problems. We must detox, it's easy, intellectually ban the miserable chemicals.
They started very well in the EU, uh, 10,000 chemicals in cosmetics. They banned 1500. If they got the right 1500, that's not bad. Canada has banned about 550 , and America has banned 12. So if we want to poison ourselves in a way, that's our business, but at least there are some good examples. We can support this.
Technically it is very simple. Maybe China will wake up and actually have the power to ban all these toxic chemicals. And the other, much more complicated thing is that we have to detox capitalism. We need to create a form of capitalism that truly values families and 2.1 healthy, well-educated children.
This is a genuine request. This is really difficult. But if we do n't, we will fail. And I think we have a chance to compete. And from an investment perspective, if you had to leave the audience with one practical lesson from your career, what would it be? Question everything you hear. Look at the data.
Okay, great advice. Thank you very much for joining us today, and I really appreciate all of your time and your thoughts. Thank you. It was nice. Thank you for joining us on The Long View. Please take a moment to subscribe and rate the podcast on Apple, Spotify, or wherever you get your podcasts. You can follow me on social media at Amy Arnott on LinkedIn.
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