Just like there are risks associated with trend-following (lagging at the turns) there are risks associated with forecasting (being too early or just plain wrong.) As far as forecasters go, Jeremy Grantham has been pretty good.
Jeremy Grantham warned in January 2000 that U.S. equities were “more overpriced than at any time in the last 70 years due to the massive overpricing of technology and especially dot-com stocks.” By the end of 2002, the Standard & Poor’s 500 Index had fallen 40 percent and technology shares were down 73 percent. The forecast didn’t help his firm, Grantham Mayo Van Otterloo Co., because he’d been bearish since 1997. Assets declined 45 percent in the late 1990s as customers sought out better- performing mutual funds that liked the technology stocks Grantham disdained.
He recommended avoiding Japanese stocks more than two years before they started falling at the end of 1989.
Two of Grantham’s most recent forecasts were right — and timely. In 2007, he wrote in his newsletter that all asset classes were overvalued and it was time to sell high-risk securities. In March 2009, when the S&P 500 index bottomed out at 676, Grantham wrote that fair value for the benchmark of the largest U.S. stocks was 900, or 33 percent higher.
Looking back on more than 40 years in the investment business, Grantham summed up his career this way: “We win all the bets but we are horrifically early,” he said. [Bold is my emphasis]
It appears that his firm’s performance has been very good over time, but Grantham’s own assessment of his tendency to be “horrifically early” is just something his investors have to be aware of and accept. I am always impressed with those managers who are fully aware of the weaknesses of their strategies, but accept them as the price that must be paid in order to acheive excellent long-term results.
