Jeremy Grantham’s 2010 first quarter investor letter (.pdf) appends the first part of a speech he gave at the Annual Benjamin Graham and David Dodd Breakfast at Columbia University in October last year. The speech was titled Friends and Romans, I come to tease Graham and Dodd, not to praise them. In it Grantham discussed the “potential disadvantages of Graham and Dodd-type investing.” It seems to have struck a chord, as I’ve received it from several quarters. As one of the folks who forwarded it to me noted, we learn more from those who disagree with us.
Hat tip Toby, Raj and everyone else.
[…] Grantham on the potential disadvantages Graham-and-Dodd investing […]
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I do not believe that Grantham acts like no value investor made money in the 80s and 90s. I was fortunate (read: willing to cough up the entrance fee) to attend the Graham and Dodd breakfast in 2009, and my recollections are much more along the lines that Grantham was criticizing a bottoms-up only approach to investing. He used a metric that is discussed in literature (among them Tweedy, Browne’s “What Has Worked in Investing”) as an example of caution.
Grantham’s speech was much more about a top-down value approach and its complementary nature to a bottoms-up only approach. I found it quite compelling, given that his process worked in making the right investment decisions in 2000 and 2008 (though his investors were not patient enough). I also found it compelling because thinking top-down could be a tool in avoiding some value traps.
Finally, bubbles occasionally break out of the mold (I believe the U.K. and Australian housing bubbles might be those two bubbles that are not going back to trend at present, based on reading the letter). But even a bottoms-up margin of safety approach doesn’t approach 100% success. So why criticize Grantham over his approach to handling bubbles because right now it seems that two are not breaking to trend? This really could be a matter of time of writing. For example, if this speech had been delivered in 2003 or 4, Grantham would have said something along the lines of a most recent bubble, that of the US stock market, defying historical behavior of bubbles, since after bursting it promptly started reinflating beyond trend. And yet, would you argue that the US stock market was not a bubble, and that it ultimately did not burst? Hence, these two errant ones probably will burst, if history is any guide. And woe to us if they do not, unless we really are gluttons for more pain in the future.
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Amigos, keep an open mind. Attack the argument, not the person. There are several brilliant questions in that lecture:
* What is easier, than a sector/asset class reverses to the mean or a single stock?
* Does low quality business with substantial assets really provide downward protection in a catastrophic event… like the great depression?
* Are bubbles that difficult to anticipate and profit from (at least from the rebound)?
* Can you really manage institutional money and follow a pure Graham strategy?
* Can quality be the holy grail and how would you quantify it?
Any honest person that has read Graham and followed a pure strategy sooner or later will face those questions.
Disclosure:
* I am no big fan of Hayek
* Keynes was the first investor that I read that made any sense
* And I much rather wait for cataclysms before looking for survivors
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Interesting how GMO recently brought James Montier (previously at Soc Gen) onto their “asset allocation” team.
Montier is a unabashed defender of Graham-and-Dodd investing, which is basically the use of quantatative methods to avoid the folly of forecasting and the madness of crowds.
In his presentation, Grantham mentions he never read Security Analysis, and then read only “the chapters that mattered to me.” Considering this, Grantham’s criticisms would be about as useful as a sermon from a Baptist preacher who has only studied the Gospels and a few of Paul’s letters.
If Grantham intends to speak intelligently about Graham’s investing principles, he should not only take the time to read ALL of Security Analysis, but be sure to read The Intelligent Investor, and all of Graham’s articles, essays, lectures, and interviews. It is a body of work with a consistent message that spans seven decades on Wall Street.
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Montier is also an unabashed defender of using a top-down view in investing too – unless he really changed his mind after writing his ten tenets of investing and having it published in his “Value Investing” book.
Montier also references Grantham (positively) quite a bit in his book, which has plenty of articles he wrote at SocGen before going over to GMO. So if I was to use a simple decision tree to decide if I trusted Grantham and his approach, I would decide yes on the basis that Montier does.
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I agree. I also find it interesting that Mr. Grantham makes the comparison between a statement Benjamin Graham made “The market is not a weighing machine…rather should way say that the market is a voting machine” – and criticize the modern value investor for using a completely opposite take that was penned by Warren Buffett, not Ben Graham, “In the short run, the market’s a voting machine and sometimes people vote very unintelligently. In the long run, it’s a weighing machine and the weight of business and how it does is what affects values over time.”
Grantham criticizes the modern investor for using the latter phrase in which he assumes that the modern value investor is quoting Ben Graham. Apperantly Mr. Grantham doesn’t know very much about Warren Buffett either because if he had he would have recognized that the latter phrase is not a Ben Graham quote at all and that the modern value investor already knew that. I get the feeling that the only investor that lacks the understanding to the value approach is Grantham himself.
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Interesting article and thank you for making us aware of it. Without going into detail, I find it interesting that you never know the true story anytime Mr. Grantham opens his mouth.
The event lecture took place on October 7th, 2009 in which he states: “We are up to 34 completed bubbles. Every single one of them has broken all the way back to the trend that existed prior to the bubble forming, which is a very tough standard.”
Yet, on April 19th, 2010, 6 months after that statement, Mr. Grantham stated: “We found, over the years, 34 of them (bubbles) and as of the present – 32 have moved all the way back down to the trend that existed prior to the bubble forming.”
I, personally, don’t trust people that say one thing and mean another. That’s about all I have to say concerning the usefulness of Mr. Grantham’s advice. It seems to me that it would be quite an undertaking just to fact check all of his data, which by his own admission, seems to be one thing on one particular day and a completely different fact the next.
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Incidentally, here’s the video of him saying a different story that I referred to in my previous post.
http://www.ft.com/cms/s/0/b1b28666-4f01-11df-b8f4-00144feab49a.html
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I respect Grantham and agree with him on the first part of his letter, but cannot agree with him on this. Grantham’s argument was sooo weak. He acts as if no value investor made any money between the ’80s and late ’90s…. This clearly isn’t true.
First, he assumes price to book is the correct way to measure the success of “value investing,” as if “value investors” use only price to book. He, just like every academic with the same argument, doesn’t truly understand “value investing” and thinks stocks can be classified into “value” and “growth” stocks by their price to book ratios. I don’t think any modern value investors look solely at price to book. In fact, I very rarely look at price to book myself. The relevance of the ratio is highly dependent on the type of company.
As far as the stickability of value investing, the best value investors have value investors as clients. Client who understand the principles. They reject those clients seeking jump on whatever has worked well recently.
Grantham also tries to discredit Graham, and value investing in general, by bringing up the fact that Graham went virtually bankrupt during the crash of 1929 because he was highly leveraged and net long. Let’s not forget that Security Analysis was written in 1934, after the crash. I think we can safely assume that Graham learned something from this experience. Also, I don’t believe many value investors use any leverage at all these days.
Grantham just “doesn’t get it.”
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I would actually love it if all I had to do was look at P/B because book value was so transparent and usable, unfortunately like you mention that’s not almost never the case.
It seems to me that liquidation value is possibly as transparent a book value as you can get. I would be curious to see a study where companies are compared on a price to liquidation value basis, my suspicion is evaluation on that metric alone would produce acceptable gains.
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There are several studies looking at liquidation value (using net current asset value – NCAV – as a proxy) and all conclude that buying at 2/3s of NCAV works very well, all over the world, and over different periods of time. See my About page for more on the studies (note the “Ben Graham’s Net Current Asset Values: A Performance Update” paper found “[the] mean return from net current asset stocks for the 13-year period was 29.4% per year versus 11.5% per year for the NYSE-AMEX Index. One million dollars invested in the net current asset portfolio on December 31, 1970 would have increased to $25,497,300 by December 31, 1983.”.
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