The Round Trip

From Jeremy Grantham:

"Far more typically, I was three years too early in the Japan bubble. We at GMO got entirely out of Japan in 1987, when it was over 40% of the EAFE benchmark and selling at over 40x earnings, against a previous all-time high of 25x. It seemed prudent to exit at the time, but for three years we underperformed painfully as the Japanese market went to 65x earnings on its way to becoming over 60% of the benchmark! But we also stayed completely out for three years after the top and ultimately made good money on the round trip.

Similarly, in late 1997, as the S&P 500 passed its previous 1929 peak of 21x earnings, we rapidly sold down our discretionary U.S. equity positions then watched in horror as the market went to 35x on rising earnings. We lost half our Asset Allocation book of business but in the ensuing decline we much more than made up our losses."

There are certain pockets of the market today that probably warrant caution. And any extreme run-up in prices typically results in lower future returns. More Grantham:

“The one reality that you can never change is that a higher-priced asset will produce a lower return than a lower-priced asset. You can’t have your cake and eat it. You can enjoy it now, or you can enjoy it steadily in the distant future, but not both – and the price we pay for having this market go higher and higher is a lower 10-year return from the peak.”

On the other side, there are pockets of the market that are finally coming out of a long period of underperformance. The recent showing from emerging markets has rewarded investors holding a globally diversified portfolio. Hindsight will tell us if this is a sustainable trend, or not.

Good investing should be evaluated in the context of compounding over a period of time - not a particular snapshot in time. The cumulative experience on the round trip is what matters - both when a snapshot in time looks brilliant, or when it looks disastrous.

GMO is unique because they view time differently. There are less investors willing and able to compete on this long horizon. And this may one of the last competitive edges remaining in investing.

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^Sources:

^{"Waiting For the Last Dance" Jeremy Grantham}

^{"Outlook on Emerging Markets" Lazard Asset Management}

Past performance is not an indication or guarantee of future results.

^{The content in this article was prepared by the article’s author. Voya Financial Advisors, Inc. does not endorse its content, and the views expressed may not necessarily reflect those held by Voya Financial Advisors, Inc.}