The longest quarterly letter ever

Legendary investor Jeremy Grantham of GMO's latest quarterly newsletter titled “The Longest Quarterly Letter Ever” is quite long, but filled with plenty of insights for investors. The letter holds the weight of experience and foresight, coming as it is from the man, who called the last decade's bubbles and predicted the market bottom in March 2009. That his firm manages over $100 billion assets only adds that much more strength to his words!

Here are the excerpts:

Believe in history: “History repeats and repeats, and forget it at your peril. All bubbles break, all investment frenzies pass away.” Asking investors to ignore the vested interests of the industry “who will assure you that this time it's a new high plateau or a permanently higher level of productivity,” he writes that investors' task is to survive until the market goes back to its fair value.

Don't put all of your treasure in one boat: “Several different investments, the more the merrier, will give your portfolio resilience, the ability to withstand shocks. Clearly, the more investments you have and the more different they are, the more likely you are to survive those critical periods when your big bets move against you.”

Be patient and focus on the long term: Asking investors to “wait for the good cards”, he writes that investors should wait until finally a very cheap market appears which will be their margin of safety. After that “all you have to do is withstand the pain as the very good investment becomes exceptional.”

Recognise your advantages over the professionals: “The biggest problem for professionals in investing is dealing with career and business risk. The second curse of professional investing is over-management caused by the need to be seen to be busy, to be earning your keep,” he writes. In contrast the individual is better-positioned to wait patiently for the right pitch while paying no regard to what others are doing.

Try to contain natural optimism: Optimism comes with a downside, especially for investors: optimists don't like to hear bad news. “In a real stock bubble like that of 2000, bearish news in the US will be greeted like news of the bubonic plague; bearish professionals will be fired just to avoid the dissonance of hearing the bear case.”

But on rare occasions, try hard to be brave: Individuals can make bigger bets than professionals when extreme opportunities present themselves. “If the numbers tell you it's a real outlier of a mispriced market, grit your teeth and go for it.”

Resist the crowd: cherish numbers only: The best way to resist this is to do your own simple measurements of value, or find a reliable source (and check their calculations from time to time), he writes. In the end it's quite simple. Really: Explaining how forecasts and estimates aren't about nuances and PhDs he says that the problem is that “though they may be simple to produce, they are hard for professionals to implement.” Individual investors, however, may find it much easier.

This above all: to thine own self be true: For individual investors to be effective, it is “utterly imperative that you know your limitations as well as your strengths and weaknesses. If you can be patient and ignore the crowd, you will likely win.” But if you imagine you can and then adopt a flawed approach, “it guarantees a pure disaster”.

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