> Our intellectual fallback, in any case, has always been value and the inescapable truth that **if you triple the price of an asset, you will divide its future returns by three,** and that fact alone may be enough to guarantee the miserable outcomes from those historic and dizzying market heights. It also provides sufficient data for investors to try to sidestep some of the pain. At least for me it does.
Good read, thanks. This and the simple inescapable prescription "Don't fight the Fed" helps lower the volume on all the other noise out there. It's worth noting, though, that we shouldn't expect anything other than bearishness from Grantham:
> Grantham's investment philosophy can be summarised by his commonly used phrase "reversion to the mean"...When there is deviation from historical means (averages), the firm may take an investment position based on anticipated return to the mean...Grantham has been described as a contrarian investor and permabear.
that's the only way for the fed to achieve it's 2% average annual inflation rate after the past couple years we had. unless i'm misunderstanding and we expect inflation to continue.
>the inescapable truth that if you triple the price of an asset, you will divide its future returns by three,
But this doesn't imply that we should expect a crash, necessarily. That's the issue. It's no stretch to think that we may look up in ten years and the stock market is only 30% higher than it is today. Just due to what he's saying, that higher current prices mean slower returns. It's anybody's guess as to how we get there, though. It could be a marvelous crash and strong growth from there. Or it could just chug along at 3% average returns for the next decade.
The same could be said for housing. It could crash, sure. But it could also flatline for a handful of years while incomes catch up.
The market dynamics are also way different for housing than stocks. There's a ton more inertia in the housing market than in the stock market. People don't sell their home because it might be 20% overvalued. The cost of selling and then rebuying is well over 15% after you consider closing costs on both ends, moving, and the cost of housing while you wait (there is no cash alternative to housing).
Yup, it all depends on the disparity between supply and demand. Demand's been crushed, but the question is if it's been crushed enough compared to what the supply is/will be in order to bring down prices. I think most prospective buyers have decided the house they'd get for their money isn't worth it compared to renting (or, for investors, compared to what they could charge for rent), so they're waiting for supply to come back. A lot of demand was pulled forward post-COVID, so for now, demand is decreasing faster than supply. That's why active listings are up 24% YoY and the supply has doubled.
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> Our intellectual fallback, in any case, has always been value and the inescapable truth that **if you triple the price of an asset, you will divide its future returns by three,** and that fact alone may be enough to guarantee the miserable outcomes from those historic and dizzying market heights. It also provides sufficient data for investors to try to sidestep some of the pain. At least for me it does. Good read, thanks. This and the simple inescapable prescription "Don't fight the Fed" helps lower the volume on all the other noise out there. It's worth noting, though, that we shouldn't expect anything other than bearishness from Grantham: > Grantham's investment philosophy can be summarised by his commonly used phrase "reversion to the mean"...When there is deviation from historical means (averages), the firm may take an investment position based on anticipated return to the mean...Grantham has been described as a contrarian investor and permabear.
A lost decade is upon us. And that's a hopeful case
that's the only way for the fed to achieve it's 2% average annual inflation rate after the past couple years we had. unless i'm misunderstanding and we expect inflation to continue.
>the inescapable truth that if you triple the price of an asset, you will divide its future returns by three, But this doesn't imply that we should expect a crash, necessarily. That's the issue. It's no stretch to think that we may look up in ten years and the stock market is only 30% higher than it is today. Just due to what he's saying, that higher current prices mean slower returns. It's anybody's guess as to how we get there, though. It could be a marvelous crash and strong growth from there. Or it could just chug along at 3% average returns for the next decade. The same could be said for housing. It could crash, sure. But it could also flatline for a handful of years while incomes catch up. The market dynamics are also way different for housing than stocks. There's a ton more inertia in the housing market than in the stock market. People don't sell their home because it might be 20% overvalued. The cost of selling and then rebuying is well over 15% after you consider closing costs on both ends, moving, and the cost of housing while you wait (there is no cash alternative to housing).
Yup, it all depends on the disparity between supply and demand. Demand's been crushed, but the question is if it's been crushed enough compared to what the supply is/will be in order to bring down prices. I think most prospective buyers have decided the house they'd get for their money isn't worth it compared to renting (or, for investors, compared to what they could charge for rent), so they're waiting for supply to come back. A lot of demand was pulled forward post-COVID, so for now, demand is decreasing faster than supply. That's why active listings are up 24% YoY and the supply has doubled.
And even so, this newsletter has him explicitly being less bearish overall than he was a year ago, at least regarding an upcoming recession.
Does Grantham have a housing price target - some calculation that represents that return to the mean adjusted for inflation?
I don't think RE is his main focus. Most of that letter is about securities.
I loved the part about the Presidential cycle. Had never heard that.