GMO Letter

Here is a great quarterly letter from GMO and it's well known steward, Jeremy Grantham. I would encourage everyone to read it. He is a tremendously successful investor who's goal is absolute return; not relative. In other words, his goal is to make money, or at least not lose it. One would think that all mutual funds would operate this way, but the dirty little secret is that they don't. Many, including some of the largest, operate for relative returns. This means that the only desire they have is to not lose more than the other guy. Thus, when we get a chance to read what someone like Grantham thinks, I think it's worthy of the time.

Here is the link ( you need to register to get the letter. it's the 2nd quarter letter to shareholders ):

http://www.gmo.com/america

He makes a lot of great points in this letter about the continued housing market bubble, at what level it might end ( on average another 17% to the downside or 4 flat years ) and it's implications. This assumes that it does not overshoot to the downside, which is a very high probability. I guess we should consider ourselves lucky that we don't live in the UK. He predicts that they are just starting their collapse and it will be as much as 40% to the downside!!

A large part of his investment philosophy is the belief that all bubbles eventually revert back to their statistical means. This certainly has been true in regards to Internet stocks and housing. Are we about to experience the unwinding of the credit boom bubble that began in 1982. One year now into the credit bubble burst seems to say yes. Both Grantham and Soros seem to think so. I wouldn't want to bet against them.

So what is an investor to do? Well, we probably would be all well served to reverse condition ourselves to buying the dips. If you look at his table he provide on page 6 you will see that in real terms returns have been awful over the past decade. Most people aren't even aware of it. If you are lucky to catch some of the panic drops along the way, then be sure to take some profits. If there is anything that has proven to be true in this bear market, there is a good chance that you will get another chance to buy things cheaply again.

If you don't have a chance to read this whole letter, try to take a look at his essay at the end. It's truly fascinating and ties into the current environmental issues we all face. As a proponent of a stronger energy policy focused upon renewables and a less wasteful way of life in general, I think Grantham nails it when he encourages us to think of our resources as irreplaceable. What is the alternative?

"The prices of commodities are likely to crack short term
(see fi rst section of this letter), but this will be just a tease.
In the next decades, the prices of all future raw materials
will be priced as just what they are: irreplaceable. Oil,
for example, will never again be priced on the marginal
cost of pumping a marginal barrel from some giant Saudi
oil fi eld, as has been the practice for most of the last 100
years of oil production. Real cost is always replacement
cost and oil, a precious feedstock for chemicals and
fertilizers, simply cannot be replaced. Using marginal
cost as a substitute was ignorant and conducive to wasteful
consumption of scarce energy resources. It also enabled
us to put our collective head in the sand and ignore the
growing need for an enlightened long-term energy and
climate policy"