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Jeremy Grantham, the esteemed value investor, believes the next market crash will be on par with those of 1929 and 2000. There are countless videos where you can see his views on this topic, but the question you're probably most interested in is how to invest now to prepare for a crash. Are there still opportunities available, or is everything too expensive?
Grantham thinks that in the current market, the opportunity lies in low-growth stocks, or value stocks, as they are traditionally called. Technology, artificial intelligence, and so-called " sport" stocks are high- growth but very expensive. The stable, low-growth sections, or value stocks, are what he believes offer the best deals.
Grantham said, "I suspect selling would work out fine. However, having said that, there are large discrepancies, as there were in 2000, between US technology, which is too expensive, and everything else. Therefore, low-growth stocks are as cheap relative to high- growth stocks as they have always been, so they wo n't suffer as much.
However, I suspect there is still some running." The danger is that what he's saying is that when the crash comes, the bullish stocks will collapse. It will be the high-growth stocks, the so-called "10s" because they've just risen in price, stocks like the New America stocks, because these are the ones that are selling at high prices compared to what they contribute in terms of earnings.
When consumer and investor confidence declines, these stocks that have risen so high will have much more to lose. It's in the so-called value stocks where Ham sees the opportunity in the current market. The other opportunity that Ham will see is in emerging markets. He said that the good news is that overseas markets haven't had this same bull market and the same overpricing that we've had, and that, of course, is a godsend opportunity because you can enter emerging markets and they're not that expensive at all.
In fact, compared to the S&P 500, they're cheaper than ever. Throughout history, they've been this cheap two or three times, and each of those times has worked out very well. So you can enter emerging markets and you can see the intersection between these two ideas, that is, low- growth stocks within From emerging markets that are attractively priced, you should be able to get a really decent return in 10 or 20 years.
End of quote. This is very interesting when Graham analyzes more mature markets, especially the US, with low long-term returns. However, in emerging markets, that's where he sees the real potential. To put it clearly, examples of emerging markets include India, Mexico, Russia, Pakistan, Saudi Arabia, China, and Brazil.
These are economies that, by definition, are emerging, meaning they are not fully developed but are in that stage of development and growth in terms of business. The interesting thing about these types of markets is that investors often shy away from them even though they are growing strongly. Everyone wants to invest in countries like the US, Canada, and the UK because things are already established there.
But the problem with this is that it drives prices to very, very high levels. This is what Grantham said about the US as a market: you won't get an attractive return over 10 or 20 years on US growth stocks. There's a simple arithmetic going on that the higher the price of a The lower the asset you own, the lower the return you'll get in the long run.
There's nothing you can do to change that equation. Every day the market goes up, you only know one thing for sure: the long-term return will be lower than the previous day's. It's basic math, and let's look at it in detail. Let's say you pay $100 for a stock, and let's say the stock pays a dividend of $5 a year, so obviously that's a correct 5% return.
Now let's say you pay $200 for those same shares; now it's only a 2.5 % return per year because, since you paid a higher price, its return is now lower. All long-term investors know this, and this is one of the reasons why there are so many opportunities in those emerging markets: because very few investors look there.
Therefore, the low demand for stocks results in lower prices and higher potential returns. Another sector in this market with great opportunities is the green sector. These are his words: "I also think that stocks that benefit from the greening of the economy will do much better than the rest. Anything to do with renewable energy, electrification of the system, electric cars." Et cetera, all of this is going to have higher revenues that will eclipse the declining growth rate of the rest of the world economy.
It will take trillions of dollars to decarbonize the global system. It will dominate everyone's portfolio, and if you're going to have US stocks, those are the ones you should have. So look for a good global climate change fund. Our fund manager has one, and it's doing very well. Now that the focus is finally clear, although it took 20 years to wake up, in the last year people are slowly starting to understand the size of the problem and the need to invest money in a greener economy.
End of the city. What I mean is that right now the economy is dominated by gas, fuel, smoke, and unclean energy, but in 10, 15, or 20 years that's going to change because the world needs to become more sustainable. If you can get into those stocks now, the ones that will help this change, you'll see there's a lot of potential.
Stocks that are stuck in their old ways and profit from unsustainable energy are unlikely to do so. There's also one thing I'd like to make clear. And you have to make sure you pay a fair price for these kinds of stocks—Test stocks, Quantum Scape, and Tu Mil. They all have great potential, but as Warren Buffett says, you have to pay a fair price for a stock, below its intrinsic value.
And speaking of intrinsic value, there's something some argue gold doesn't have. Jeremy Grantham, however, isn't one of those people. He's bought gold before and doesn't see it as a bad hedge. He said gold has stood the test of twelve thousand years and passed quite well. And secondly, gold has some very interesting qualities: it doesn't tarnish, so it's unique in that sense, and everything that was ever made of gold still exists.
So I'd say yes, maybe it's not perfect because it doesn't put food on the table and doesn't pay dividends, but it has two big advantages over Bitcoin. And speaking of Bitcoin, I'm not a big fan, not even a little bit. He once said, "What is the value of Victor's dividend flow?" I can tell you that you don't need a Nobel Prize in mathematics because it's zero.
It will never pay dividends. If you're desperate, you can... Feed yourself, no, you can't. All its value is based on euphoria. So Bitcoin could be worth a million dollars per unit if you can find someone to pay it, but Bitcoin is 100% faith. What will happen when the next market phase arrives where faith is minimal?
What do we think will happen to a stock whose sole reason for being is faith and nothing but faith? End of quote. Personally, I don't completely agree with Grantham about Bitcoin. I think its technology offers much more value than traditional currency. Its market capitalization is currently much cheaper than gold's, so I think there's room for a small percentage in a portfolio of Bitcoin.
Jeremy Grantham clearly disagrees and leans much more towards gold. The only thing we definitely agree on is our rejection of the Fed and its market manipulation. Grantham said, "By driving up asset prices, you do two things. First, you make it difficult or impossible for people to enter the game. Buying a house is too expensive, and buying anything in stock is much higher per dividend or unit than it used to be, and that's brutal.
Second, Wealth capitalization decreases. If you have a 6 percent return on your assets, reinvesting it can double your money in 12 years. If you convert that to a 3 percent return, doubling the price makes it worth more on paper, but in real life, only dividends provide sustenance. Now, that 3 percent annual return means it takes 24 years to double your capital.
So, in 48 years, it's reduced to a quarter of what it would have been, and the gap becomes enormously wide. In other words, the higher the price of an asset, the lower the rate at which you can generate returns on wealth. And if you're not in the game and you're a beginner, you can have great difficulty getting in.
By definition, this means the rich get richer as returns fall and asset prices rise, while the poor are destroyed. End of town. So, this game the Fed is playing is very dangerous for investors because it makes you feel great when your stocks are rising, but it's all artificial. What it means is that if you want to buy stocks now, they are much more...
Faces of what they really should be. My personal opinion is that there will probably be many people who are going to be ruined because of this. You can't keep inflating a balloon forever; eventually, one day it will burst, and the same will happen at some point with equities. That's why it's so important that we are prepared.
Granja thinks that the opportunities are found in low- growth or value stocks in emerging markets and in green stocks. I like his strategy, I like his way of thinking, and I think that in the long run it will be worth it. Thank you all very much, and see you in the next video.
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