On December 31, 2001, Jeremy Grantham issued a 10-year forecast…
He sized up 11 different asset classes (including U.S. stocks, emerging market stocks, government bonds, corporate bonds, REITS, and more).
He predicted their 10-year returns and ranked those in order. The results were astounding… He got the order almost exactly right…
It may be the most accurate 10-year call in stock market history.
Some of the predictions are not pretty.
But based on his previous forecast, they are worth considering.
Today, let’s 1) take a quick look at his fantastic 10-year prediction, 2) go over how he makes his predictions, and then 3) look at what he’s predicting today…
In his amazing 10-year forecast (from the end of 2001 through the end of 2011), Grantham he got the top four asset classes correct (just second and third needed to be switched)… And the bottom three asset classes were correct (ninth place was exactly right, 10th and 11th needed to be switched).
Grantham predicted that U.S. stocks would be the worst-performing asset over that 10-year period. He actually predicted stocks would lose money from 2001-2011. Remember… from 1982 to 2000, stocks had their greatest run in recorded history. It seemed insane back then for a man to predict that stocks would lose money.
It turns out, U.S. stocks didn’t come in last place. They earned a real return of 0.4% annualized. So U.S. stocks finished 10th, cash finished in 11th – last – place.
Grantham’s “insane” prediction was nearly right on target.
How does Grantham come up with these predictions?
“It’s quite simple,” he told readers in his quarterly letter earlier this year. His firm “predicts asset class returns in a simple and apparently robust way: we assume profit margins and price earnings ratios will move back to long-term average… from whatever level they are today.”
Grantham says there’s nothing special about the forecasts… “These estimates are not about nuances or PhDs. They are about ignoring the crowd, working out simple ratios, and being patient.”
It’s much harder to do than you might think. But it works… “Eventually, after breaking your heart and your patience, [the market] will go back to fair value. Your task is to survive until that happens.”
You can drive yourself crazy with all kinds of fancy investment strategies. In the end, Grantham’s seven-year prediction is simple, founded in logic, and likely right on…
So what’s Grantham predicting today?
Grantham predicts that over the next seven years, bonds will lose money (after inflation). He predicts that managed timber will be the best-performing asset class, followed by emerging-market stocks.
Outside of timberland, Grantham says high-quality U.S. stocks are the best overall choice – when you take into account potential solid reward and limited risk. Grantham’s firm owns big stocks like Microsoft, Coke, Google, and Cisco in its “High Quality” fund.
Last time around, Grantham nailed it. His 10-year prediction might be the best 10-year prediction in the history of investing.
This is his latest. I suggest sticking close to it with your own money…
P.S. You can follow Jeremy Grantham’s forecasts (updated quarterly) at www.GMO.com. I also suggest reading his “Advice from Your Uncle Polonius” in his February 2012 quarterly letter… It will certainly make you a better investor.
Source: Daily Wealth