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Editor's Letter: A Contrarian Changes His Mind

I love to read GMO’s quarterly reports. For obvious reasons: Everybody loves to read about horror. GMO, for the few who don’t know, is a famous asset manager (about $100 billion in assets under management) founded by Jeremy Grantham and his partners. Grantham has become famous by making contrarian moves, such as avoiding technology stocks in the 1990s and bank stocks before the financial crisis. But, according to our mutual fund contributing editor Stan Luxenberg, in a startling speech at the Morningstar conference in June, he warned advisors to beware of straying outside the market consensus. Grantham said that during the 1990s bull market, he lost 60 percent of his assets under management because clients became impatient with his contrarian approach. Since then, Grantham has been more careful to hedge his bets. Instead of just buying the best bargains, he is diversifying more to give clients results that they can stomach. He told financial advisors in the audience to stay diversified and do what is necessary to hold onto clients.

I finally got around to reading GMO’s second-quarter  remarks. Grantham’s shareholder letter was a bearish screed predicting starvation, slow global growth and further terrorist attacks that will disrupt the global economy, among other things. In short, it was a Malthus-like prediction of dystopia, masses starving. Here is how investors should position themselves, said Grantham:

“These comments are based on a time horizon of 10 years and beyond. The portfolio investment implications are that investors should expect resource stocks—those with resources in the ground—to outperform over the next several decades as real prices of the resources rise. Farming and forestry, though, are at the top of the list. Serious long-term investors should have a very substantial overweighting in a resource package. I suggest for long-term investors a resource position of at least 30 percent. Another relative beneficiary of resource pressure is the quality group of equities. Resources are a smaller fraction of final sales than average and higher profit margins make them more resilient to margin pressures.”

In short, buy farms and food companies. I agree with him, to a point. Yes, I would increase resource company securities. But the world population explosion theory that will throw the world into chaos is an old one. It won’t happen. Malthus predicted death from starvation because of a want of food. Farms are fewer, but food is abundant. To me, there is no such thing as a limited resource. Quite the contrary. Humans are smart. When the whales were killed off, humans discovered how to use fossil fuels. When the Empire of Japan cordoned off the Allies’ access to rubber, some smart guys in Akron invented synthetic rubber. As one money manager told me, the time to invest is when you won’t want to.




David A. Geracioti


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