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The Most Accurate Investment Forecast EverBy
Tuesday, June 19, 2012
On December 31, 2001, Jeremy Grantham issued a 10-year forecast...
He sized up 11 different asset classes (including U.S. stocks, emerging market stocks, government bonds, corporate bonds, REITS, and more).
He predicted their 10-year returns and ranked those in order. The results were astounding... He got the order almost exactly right...
It may be the most accurate 10-year call in stock market history.
Today, I'll share with you Grantham's latest long-term forecast...
Some of the predictions are not pretty. But based on his previous forecast, they are worth considering. Today, let's 1) take a quick look at his fantastic 10-year prediction, 2) go over how he makes his predictions, and then 3) look at what he's predicting today...
In his amazing 10-year forecast (from the end of 2001 through the end of 2011), Grantham he got the top four asset classes correct (just second and third needed to be switched)... And the bottom three asset classes were correct (ninth place was exactly right, 10th and 11th needed to be switched).
Grantham predicted that U.S. stocks would be the worst-performing asset over that 10-year period. He actually predicted stocks would lose money from 2001-2011. Remember... from 1982 to 2000, stocks had their greatest run in recorded history. It seemed insane back then for a man to predict that stocks would lose money.
It turns out, U.S. stocks didn't come in last place. They earned a real return of 0.4% annualized. So U.S. stocks finished 10th, cash finished in 11th – last – place.
Grantham's "insane" prediction was nearly right on target.
How does Grantham come up with these predictions?
"It's quite simple," he told readers in his quarterly letter earlier this year. His firm "predicts asset class returns in a simple and apparently robust way: we assume profit margins and price earnings ratios will move back to long-term average... from whatever level they are today."
Grantham says there's nothing special about the forecasts... "These estimates are not about nuances or PhDs. They are about ignoring the crowd, working out simple ratios, and being patient."
It's much harder to do than you might think. But it works... "Eventually, after breaking your heart and your patience, [the market] will go back to fair value. Your task is to survive until that happens."
You can drive yourself crazy with all kinds of fancy investment strategies. In the end, Grantham's seven-year prediction is simple, founded in logic, and likely right on...
So what's Grantham predicting today?
Grantham predicts that over the next seven years, bonds will lose money (after inflation). He predicts that managed timber will be the best-performing asset class, followed by emerging-market stocks.
Outside of timberland, Grantham says high-quality U.S. stocks are the best overall choice – when you take into account potential solid reward and limited risk. Grantham's firm owns big stocks like Microsoft, Coke, Google, and Cisco in its "High Quality" fund.
Last time around, Grantham nailed it. His 10-year prediction might be the best 10-year prediction in the history of investing.
This is his latest. I suggest sticking close to it with your own money...
Good investing,
Steve
P.S. You can follow Jeremy Grantham's forecasts (updated quarterly) at www.GMO.com. I also suggest reading his "Advice from Your Uncle Polonius" in his February 2012 quarterly letter... It will certainly make you a better investor.
Further Reading:
If you're interested in learning more about investing in managed timberland, start Steve's brief overview here: The Ultimate Agriculture Investment. And then read this two-part series from 2010: Should You Buy Timberland Stocks Now? Part I and Part II.
We've devoted plenty of DailyWealth space to high-quality stocks. As Editor in Chief Brian Hunt likes to say, "We practically went to your house and made you buy them." But in case you missed it, discover why we think buying these stocks is the greatest stock market system ever discovered.
Market NotesTHE VOLATILITY INDEX JUST RAISED A CAUTION FLAG Yesterday, we noted how similar the stock market action is this year to 2011. We saw another similarity yesterday – but not a good one.
Below is a chart of the Volatility Index (the "VIX") plotted against its Bollinger Bands (BBs). Bollinger Bands illustrate the typical trading range for a stock or an index. When a chart moves outside its Bollinger Bands, it signals an extreme condition… which often leads to a reversal in the other direction.
For example, the red circles on the chart indicate times when the VIX dropped below its lower BB, showing an extreme oversold condition. The VIX rallied shortly after the three previous occasions. And in typical fashion… when the VIX rallies, the stock market falls.
The S&P 500 lost only 1% following the VIX signal in January. It lost just 2% following the signal in March. But last July, the S&P 500 lost 16%. This is definitely something to keep in the back of your mind.
– Jeff Clark
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