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Should You Listen to Jeremy Grantham?

As I write this the stock market is down about 7% so far this year (as measured by the S&P 500 Index). In my morning email was a blurb from MarketWatch titled “US market approaches end of superbubble says Jeremy Grantham.” The story outlines Grantham’s belief that dire consequences for equity investors are only beginning. Ironically, he makes no forecast on exactly how far down he thinks the stock market will go – what, you can’t call the bottom?

Should investors heed Grantham’s warning? Before selling all your stocks and running for the hills consider this. In October 2020 Grantham had a similar warning, suggesting that stocks would fall in the coming weeks or months. Since that prediction the S&P has returned over 27%.  

As they say in the informercials, but wait there’s more! In 2014 Grantham was predicting that stocks “will end badly in 2016. However, since May 2014 the S&P 500 went from 1900 to 4455, a gain of more than 14% annualized!  

One quote from Grantham reveals a trap which snares many investors: “the stories are more important than the price.” This quote came from a February 2018 article in Institutional Investor, in which he yet again forecast a correction was in the offing.

Stories are compelling, a good story always beats a data driven argument in the minds of most people. But just look at the investment carnage that would’ve resulted had one acted on Grantham’s predictions of a market downturn. Had you acted on Grantham's prediction in May of 2014 you would have missed the opportunity for a $100,000 investment in the S&P 500 to grow to $292,000 as of yesterday. You must be present to win, as they say.

Who knows, maybe this time Grantham is right. Market declines are a natural part of investing, but once out of the market, a decision must be made when to re-enter. And who are we going to look to for that wisdom, Jeremy Grantham? Based on his past forecasting performance, no thank you.