Grantham – Invest Like This To Prepare For The Next Crash

Speaker 1: Jeremy Grantham, the real estate value investor, thinks that the next market crash will rival the one that we had in 1929 and 2000, you can see in my previous video to see his full viewpoints on why that is the case. But arguably, an even bigger question is how do we invest to prepare for crash?

Are there any opportunities available or is everything overpriced? So Grantham thinks that in today’s market, the opportunity is in the low growth stocks or the value stocks that you’d traditionally call them, the technology, the IEA, the so-called 10 X stocks. Those are high growth, but very pricey. The stable, low growth stocks, these are the ones that he thinks offer better deals, Grantham said. I suspect Sulien everything would work out just fine. However, having said that, there are major discrepancies, as there were in 2000, between the US tech, which is overpriced and everything else. So the low growth stocks value are about as cheap relative to the high growth stocks as they ever get. So they will not have the same pain, but they are still at risk to some degree. I suspect what he’s saying is when the crash comes, the ones that are going to get wiped out the most will be the high growth stocks, the so-called 10x ones that have just shot up in price, the likes of Tesla, Neoh, some Dekha, etc. because these are the ones that sell at high prices compared to what they bring in in terms of profits.

When consumer and investor confidence decreases, these stocks that have gone up so high have the most to lose. So value stocks, that’s where Grantham’s sees opportunity in today’s market. Note that down. The other opportunity that Grantham sees is in emerging markets, he said. The good news is that overseas they have not had the same huge bull market and the same overpricing that we have had. And that, of course, is a heaven sent opportunity because you can go into the emerging markets and they are absolutely not that expensive. And compared to the S&P, they are about as cheap as they’ve ever been. There have been this cheap two or three times, and each time it’s worked out very well. So you can buy emerging markets and you can look at the intersection between those two ideas, which is the low growth stocks within the emerging markets. And they are handsomely priced. You should be able to make a rally decent 10, 20 year return there, end quote. So that’s interesting. When Grantham looks at the more mature markets, especially the USA, he sees low long term returns, the emerging markets. However, that’s where he sees the real potential for those who don’t know. Examples of emerging markets include India, Mexico, Russia, Pakistan, Saudi Arabia, China, Brazil. These are economies that are as per the word emerging. They’re not fully developed, but they’re in that stage of developing and growing in terms of business. Now, the interesting thing about these types of markets is that investors often shy away from them, even though they’re growing strongly. Everyone wants to invest in the likes of the USA or Canada or the UK because things have been established there. But the problem with that is this elevates prices to very high levels. This is what Grantham’s said on the USA as a market, you will not make a handsome 10 or 20 year return and US growth stocks there is in the air a simple arithmetic. The higher you bid up a price of an asset, the lower the long term return you will get. There is nothing you can do to change that equation. Every day the market goes higher. You know only one thing with certainty that the long term return will be less than what it was the day before. This is basic math. Let me show you. Let’s say you pay a hundred dollars for a stock and we’ll say that stock pays a five dollar dividend a year. So that’s obviously a five percent return right now. Let’s say you pay 200 dollars for that exact same stock.

Now, it’s only a two point five percent return a year because you paid a higher price. Your return is now less every season. Investor knows this. And this is one reason why there’s so much opportunity in those emerging markets because so few investors are looking there. Hence, low demand for stocks, results in lower prices and higher potential returns. Another sector in this market where. Sees opportunity is the green sector, he said. I also think shares that benefit from the greening of the economy will do much better than the rest. Anything to do with renewable energy, the electrification of the system, electric cars, etc. These are all going to have top line revenues that dwarf the declining growth rate of the rest of the global economy. It will take trillions of dollars to decarbonize the global system. It will dominate everyone’s portfolio. And if you have to own U.S. stocks, they’re the ones to own. So look around for a good global climate change fund. I’m happy to say that GMO has one and they’re doing very well now that the focus is clearly finally took 20 years to wake up. But in the last year, people are really beginning to understand the size of the problem and the need to move money into greening the economy and quotes. So what he’s getting at is currently the economy is dominated by gas, fuel, smoke and unclean energy. But in 10, 15, 20 years time, that’s going to change because the world needs to become more sustainable. If you can own those stocks now that are going to help this change, while there’s a lot of potential there, the stocks that are stuck in their old ways and benefit from unsustainable energy, while they’re unlikely to do as great. The one thing that I would like to add to this is make sure that you pay an appropriate price for these types of stocks.

The likes of Tesla, Cuonzo Skype, A2 milk. Yes, they all have strong potential. As Warren Buffett says, you must pay a fair price for a stock below its intrinsic value. And speaking on intrinsic value, something which some argue doesn’t have intrinsic value is gold. Grantham is not one of those people. He has bought gold before and doesn’t mind it as an investment and hedge, he said. Gold has had the odd 12000 year test, which it has passed pretty well. And secondly, gold does have some fallback qualities it doesn’t tarnish. It’s unique in that sense. Everything that was ever made of gold is still around. So I would say, yes, I’m nervous about gold because I can’t eat it and it pays no dividend. But it has two wicked advantages over Bitcoin, which, by the way, Bitcoin Grantham is not a fan of one bets. He said, what is the future value of the dividend stream of Bitcoin? I can tell you that it doesn’t take a prize winning mathematician. It is. No, it will never pay you a dividend if you’re desperate. Can you eat it? No, you can’t. It’s entire value is on. The greater fool is a not so bitcoin could be worth a million dollars a unit if you can find someone to pay it.

Bitcoin is one hundred percent faith come the next market phase where faith is at a minimum, what do we think will happen to a stock whose entire reason for existence is faith and nothing but faith? And quote, Now, I don’t completely agree with Grantham on Bitcoin here. I think it’s technology offers so much more value of a traditional currency. Its market cap is currently a lot cheaper than gold’s. So I think there is room for a small percentage in one’s portfolio for Bitcoin Grantham. He clearly disagrees and he leans much more towards gold. The one thing that we definitely do agree on is that just like towards the Fed and its market manipulation, Grantham said by pushing up asset prices, you do two things. You make it difficult to impossible for people to get into the game. The purchase of a house is too expensive. The purchase of anything in stocks is much higher per dividend or units than what it was. So that’s brutal. Secondly, the compounding of wealth is reduced. If you have a six percent yield on your assets by reinvesting that, you can double your money in twelve years. If you turn it into a three percent yield by doubling your price, you’re worth more on paper. But in real life you can only eat the dividends. And now they’re three percent a year and you double your money in twenty four years. So in forty eight years you’re down to a quarter of what you would have been. And the gap becomes ruinously wide. In other words, the higher the asset price, the lower the rates at which you can compound wealth. And if you’re not in the game and you’re a beginner, you can have great difficulty ever getting into that game. By definition, it means that the rich get richer as you price down the yield and mocap asset prices and the poor get squeezed and quotes. So this game, which the Fed is playing, is so.

Dangerous to investors, because it makes you feel great, because your stocks are going higher, but it’s all artificial and what it means if you want to buy stocks now, that’s so much more expensive than what they really should be. My personal opinion is that a lot of people are going to get burned because of this. You can’t keep putting air into a balloon until one day it pops. And the same thing will at some point happen to equities. This is why it’s so important that we stay prepared. Now, Grantham thinks that the opportunities lie in the low growth value. Stocks in the emerging markets and in green equities are like a strategy. I like his way of thinking and I believe it’s going to pay off for him in the long term. Thank you for watching, everyone.

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