Did you hear the one about one Octogenarian (80-plus year old) and two Nonagenarians (90-plus year olds) sitting in a bar?
The Octogenarian asked ‘What did the bubble say after meeting a pin?’
The slightly older Nonagenarians could not resist the temptation to spoil the punchline.
Together they replied…‘I get your point.’
These three elderly gentlemen are not your run-of-the-mill pub patrons. Their combined wealth is measured in the tens of billions of dollars. Between them there’s 262 years of life experience…most of it gained from participating and observing markets.
Jeremy Grantham is the Octogenarian (born 6 October 1938). He founded Grantham, Mayo, Van Otterloo & Co (GMO) in 1977. Today the firm manages in excess of US$100 billion.
Grantham has seen all sorts of market conditions. He knows a thing or two about bubbles.
This headline is from Business Insider on 18 June 2020:
Source: Business Insider
Here’s an extract from the article (emphasis added):
‘The investing legend Jeremy Grantham seems certain that the US stock market’s strong recovery from its historic lows in March will end in pain for investors.
‘“My confidence is rising quite rapidly that this is, in fact, becoming the fourth “real McCoy” bubble of my investment career,” he told CNBC’s “Closing Bell” on Wednesday.
‘“The great bubbles can go on a long time and inflict a lot of pain, but at least I think we know now that we’re in one.”’
In a recent Quarterly newsletter, Grantham recounted his experiences with previous bubbles (emphasis added):
‘At GMO we dealt with three major events prior to this crisis, and rightly or wrongly, we felt “nearly certain” that sooner or later we would be right.
‘We exited Japan 100% in 1987 at 45x and watched it go to 65x (for a second, bigger than the U.S.) before a downward readjustment of 30 years and counting.
‘In early 1998 we fought the Tech bubble from 21x (equal to the previous record high in 1929) to 35x before a 50% decline, losing many clients and then regaining even more on the round trip.
‘In 2007 we led our clients relatively painlessly through the housing bust. In all three we felt we were nearly certain to be right.
‘Japan, the Tech bubbles, and 1929, which sadly I missed, were not new types of events.
‘They were merely extreme cases akin to South Sea Bubble investor euphoria and madness.’
Identifying bubbles early — like he did with Japan and the tech bubble — came with a short-term performance cost.
While Grantham recognised the brutal facts of frothy, overvalued markets and acted, the optimists carried on…driving the markets higher.
In the end, it was Grantham who survived and prospered as he says of the tech bubble experience ‘losing many clients and then regaining even more on the round trip.’
On 4 November 2020, Grantham’s firm, GMO, gave this sober assessment…
‘History does not repeat, but it rhymes, as Mark Twain observed. As such, we are struck by the eerie and dangerous parallels between today’s markets and the markets back in 1999…While it is, of course, not 1999, we see ominously similar market phenomenon today. And for that reason, our advice is clear — it’s time to leave the party like it’s 1999.’
The first Nonagenarian is Warren Buffett, born 30 August 1930.
Warren Buffett was also lampooned during the ‘tech bubble’.
The Barron’s cover on 27 December 1999 (a matter of months before the bubble burst) proclaimed ‘What’s Wrong, Warren?’.
Here’s an extract:
‘After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch.
‘Shares in Buffett’s Berkshire Hathaway are set to experience their first annual decline since 1990 and their second-worst year of performance, relative to the Standard & Poor’s 500 Index, since Buffett took control of what had been a struggling New England textile maker in 1965.’
Well, they were at it again earlier this year doubting the ability of the 90-year-old legend.
As reported in Market Insider on 9 June 2020 (emphasis added):
‘Warren Buffett has been a popular punching bag in recent weeks, even though the famed investor’s biggest holding — accounting for more than 40% of his portfolio — has gained $11 billion in value this year.
‘President Donald Trump said Buffett made a mistake when he sold his airline stocks in April.
‘Billionaire investor Ken Fisher suggested the 89-year-old’s age might explain why he didn’t go on a buying spree during the coronavirus sell-off.
‘“Time to reinvent yourself, Warren” investor David Merkel said, arguing that Buffett had an “outdated view” of how far the stock market would fall. David Portnoy, the Barstool Sports founder and celebrity trader, tweeted that Buffett was “washed up” and had “lost his fastball”.’
The optimists have lost faith in Buffett.
Perhaps, the optimists should re-read this sage advice from Warren Buffett’s Berkshire Hathaway newsletter the one he wrote in 2000.
There are so many priceless and timeless gems of knowledge in these three paragraphs.
‘…speculation — in which the focus is not on what an asset will produce but rather on what the next fellow will pay for it — is neither illegal, immoral nor un-American. But it is not a game in which Charlie [Munger] and I wish to play. We bring nothing to the party, so why should we expect to take anything home?
‘The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball.
‘They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.’
What was happening in 2000 is no different to today…
All rationality has been abandoned by large doses of effortless money.
Earnings of a company matter for nothing. Speculators only focus on what the next fellow will pay for it.
Recent triumphs embolden the investing upstarts to sneer, mock and ignore the elder statesmen of the investing world.
These investors/speculators/punters are destined to pay a huge price for their own rite of passage.
The Buffett Indicator — was named after an interview he gave to Fortune magazine in 2001, when he said ‘it is probably the best single measure of where valuations stand at any given moment.’
The indicator is a measurement of market value versus economic activity (GDP).
Logic says the market should NOT be worth more than the entire economic activity that supports corporate earnings.
However, there are periods when that logic is abandoned by inexperienced and know-it-all market participants.
In the late 1990s when Grantham and Buffett refused to join the giddy participants in the tech boom party, the Buffett Indicator was above 120% and at that time, in unchartered territory.
That did not stop it going higher…finally topping out at 158.7%.
The brutal fact — that the market cannot be greater than the economy supporting it — prevailed and the ratio ‘mean reverted’ back to 75%.
Look at the current reading. 194.9%.
This rapid increase in the ratio is due to two factors…higher share market and lower GDP:
Source: Advisor Perspectives
This current ‘everything’ bubble is going to meet its pin
Anyone who believes this market can continue higher AND remain there, is, by definition a supreme optimist.
George Soros, the second Nonagenarian, was born 12 August 1930.
In an interview with Market Watch on 17 August 2020, the billionaire hedge fund manager said (emphasis added):
‘Pivoting to his legendary approach to financial markets, Soros acknowledges that investors are in a bubble fueled by Fed liquidity, which creates a situation that he now avoids.”
‘Market bubbles have NOTHING to do with valuations or fundamentals.’
This current ‘everything’ bubble is going to meet its pin.
The question is, will investors get the point BEFORE or AFTER the fact?
Albert Einstein, who died at age 76, said ‘The only source of knowledge is experience.’
The combined experience of Grantham, Buffett and Soros should be the knowledge that less experienced investors take heed of, not ignore.
Editor, The Rum Rebellion