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Chapter 1: What insights does Jeremy Grantham share about identifying market bubbles?
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And I'm Joe Weisenthal.
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Chapter 2: How does Jeremy Grantham compare today's market with historical bubbles?
Investors, you have to be banking on very rapid growth in the very short term in the coming years to expect good returns here.
Right. So obviously one of the big talking points.
I'm looking at the DES page for SpaceX. Do you know where it's headquartered?
No, actually.
Starbase, Texas.
Oh.
So they have their own town in Texas that they got to name. But that is their corporate info on the DES page, Starbase, Texas.
Well, that's definitely worth $2.7 trillion. All right. The big talking point in markets is obviously valuations, all of this AI frenzy. Is it a bubble? Is it not? But even if you think that a lot of this is speculative.
Yeah.
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Chapter 3: What signs indicate that a market bubble may be about to burst?
Like when I read that title, should I have perma bear in air quotes as in like people perceive you to be a perma bear? Or do you- I voted for quotes and the publisher didn't like it. Interesting. Yeah, because like- Because A, I associate you with warning about the markets can get over their skis and understanding market history, et cetera.
On the other hand, I look at GMO's holdings and positioning and I see ā I do not see funds that are just ā overwhelmingly in treasuries and gold and safe haven assets. I see ownership of Meta and Microsoft. This does not look like the portfolio of someone who I would think of as a, quote, perma bear, unquote.
When I was 70, I figured it was time to leave my colleagues in charge of all the day-to-day decisions. I have nothing to do with the portfolio today. My only job is to study long-term existential threats to the market and society.
And that includes the making and breaking of the great bubbles, which is fine because I have always, for 50 years at least, considered the making and breaking of the great bubbles to be the only thing that really matters. The rest of the time, show up for work, keep your nose clean, you're doing fine.
But the forming of these spectacular bubbles and their breaking really separates the men from the boys.
So you touch on this in the book, but when we're in the midst of a major bubble and people are seeing crazy returns like 17% on SpaceX, what do you tell clients? They're missing out on these huge gains. I assume you're encouraging them to be patient, to wait for that mean reversion.
But how do you actually handle the pressure of having a customer, a client who is under pressure to, at a minimum, meet their benchmark?
with great difficulty. It's always been difficult dealing with clients in a major bull market. Luckily, we've had quite a bit of experience because since Greenspan, we've gone from one overpriced market to the next, starting with the tech bubble and then the housing bubble. And then, in a sense, the end of 21 was a spectacular overpriced market and now this. So we've had a lot of experience.
And we're more careful at handling the clients now than I think we were in the tech book, where we famously lost half our book of business in two and a quarter years.
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Chapter 4: How does Grantham view the impact of AI on current market valuations?
The low-priced index were a bunch of fallen angels with enormous volatility, very high betas. And they had had a spectacular 1928, and they started to decline. Why is that? I have a theory that this relates to Mr. Prince's unusually honest answer Why is he still in the bull market? As long as the music's playing, I have to keep dancing. And that, of course, is the name of that game.
But he doesn't have to dance with Pumatek. Pumatek was the most advanced spec in 99, which was a hell of a good year to be the most advanced stock. And you don't have to go off the cliff in Pumatek. You go off the cliff in Coca-Cola. That's the ideal. And that's exactly what happened in 1929. People, in that case, actually Coca-Cola.
They gravitated to the Coca-Colas and the radios and away from the junk. And the junk started to decline. That's an incredible signal. The greatest primal scream from the stock market ever. And nothing like that happens again. You have underperformance of high flyers, but you never have them go down in a decently rising market until, drum roll, 1972, the top of the nifty 50. The S&P goes up 17.
The average S&P stock goes down 17, so I can remember the numbers forever. And then we have the biggest bear market since the Great Depression. That was a truly miserable bear market. 73, 74, whether you had small cap, large cap, quality, junk, everything went down 50% and then went adjusted for inflation closer to 65. An absolute monster. And nothing like it happens again until 2000.
In the year 2000, you may remember, the growth stocks peaked horrifically in February. The rest of the S&P did not. The rest of the S&P rose about 15%. So you had a co-equal high in October. But the growth stocks were down 40%, having been as low as 50%. By then, they rallied a little. And back in September, you had the S&P as high as it was in March of 2000.
Just amazing deviation between the growth stocks, who'd been making spectacular running in 98, 99, and early 2000, and the rest of the market that continued up. And then you had very sharp break, the end of 2000, a steady break in 2001, and then to rub it in a miserable minus 22% in 2002. And nothing like that happens again until In 2021, you may remember the mean stocks peeled off.
By the middle of the year, Cathie Wood and her portfolio were going down. By the end of the year, they were off 35%, 40% from their peak. And yet, during that same six months, the S&P powered ahead. It's really quite remarkable when they get the sign wrong. Unfortunately, I had an adventure with QuantumScape.
QuantumScape turned out to be a meme stock without my knowing it because I had a huge position personally. And the reason I had a huge position is that I was offered an opportunity to invest several years earlier on an all or nothing basis. I took this big position or I had nothing.
So I took a deep breath and it was much too big for our foundation, which we have for the protection of the environment, the Grantham family. And so I had to own it personally. So it was the only stock that I owned. It was a very big chunk. And it came as a SPAC at four times my investment, better than a kick in the pants, $10 a share up from two and a half. And within three months, it was 131.
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Chapter 5: What investment strategies does Grantham recommend during market speculation?
So this wasn't like SpaceX. This had no sales, forget no profits, and was selling for more than General Motors. Actually, I think that is more speculative than SpaceX, which I think is a very, very high hurdle.
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I'm glad you brought back 2021 because that was a weird year.
Wild times.
In a way that really was. See, I would argue that 2021 was actually much more wild than right now because of the proliferation of quantum scapes, which was one of many stories that you could tell. You could go back to the Rivian valuation at its peak or numerous others. Quantum scape is much, OK, OK. All right. All right. Fine.
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Chapter 6: How does Grantham manage client expectations in a bubble environment?
And that's because our value model looked at long-term future earnings and dividends projected as best we could. And we did that through projecting return on equity. And we did that by looking at how return on equity regressed to the mean and which factors affected the rate. Certain factors slowed it down. Market domination, price setting that you could prove, slowed it down way, way down.
And Microsoft was the perfect example of this. It had very, very low volatility. It was clearly, overwhelmingly the price setter. And consequently, our model said it was worth nine times book, not seven times book. But you were selling it. So if you have a good value model, you can buy these things. You can see them on occasions coming along.
And yes, it's done spectacularly well and has had then particularly a much better moat to me than NVIDIA has today. But if you will allow me a minute here. Please. If you look at the MAG-7. You look backwards in history, and you can say with a pretty clear conscience, each one dominates their seven different niches. They have near monopolies on a global basis.
Even Tesla has a jumpstart, the biggest and the best for a long time in EVs. And you have Amazon beginning to dominate retail. Google Research, et cetera, et cetera. Seven decent monopolies dominating the world. Justice Department, et cetera, perfectly sound asleep. No one is interested in pulling a Teddy Roosevelt.
They're not going to jump in and slash and burn and divide Exxon into seven different pieces. They're letting these things grow and fix and set their pricing and make tons and tons of money. And then you look forward. Starting from today, does it look anything like that? Doesn't it look like seven companies deciding they're all in the same market AI?
That moving the most powerfully with the greatest investment is dominant? Are they not seen here beating their chests and saying, my $200 billion in investment in a single year is bigger than your $127? Yeah, boo. They know how much gets paid off to the first mover who grabs the market. They all want to be the first. There can only be one, as they say in the movie.
And there's seven of them fighting it out. It could be a very messy, blood-curdling game. I suggested that they have it outside the White House. What a comparison.
Just imagine 10 years from now looking back and saying, you couldn't see the difference between seven easy monopolies and a dogfight of seven vicious, rich companies, huge cash flow, huge understanding of the virtues of being dominant, all deciding at the same time to fight out in one market. And you could say, yes, there was the cloud. What about that?
And the cloud was a nice, well-behaved oligopoly, three of them genteelly deciding to compete in genteel ways, exactly the right thing to do if you find yourself in that position, and clearly not the approach that is being adopted this time. We have seen huge investment. You look back, they're idea heavy, capital light.
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Chapter 7: What historical examples does Grantham use to illustrate market behavior?
So the only one as big as AI is possibly the railroads. Of course, everybody could see that the railroads were going to change the world. You arrived at the railway station in a wholesome buggy, for heaven's sake. You went seven miles an hour, and then you got on a train traveling at 60 miles an hour and went a couple of thousand miles. I mean, it was utterly revolutionary. So what happened?
Everybody could see that the railroads were going to change the world, which they did. Everybody wanted to have a piece of it, and they could. Everybody put their money in it, and you had the biggest bust. on both sides of the Atlantic that you could imagine. And everybody lost their money in railroads. And out of the ashes, the tracks were still there. The locomotives were still there.
The demand was still there. And it changed the world. And then you fast forward to the internet. Powerful idea. Clearly, by the way, accompanied by a lot of silly stuff as well. But underneath it, a very powerful idea. So you had Amazon go up six or seven times in 99. And when the market broke, it went down famously, infamously, 92%. Check it, 92%.
And then it rose from the ashes, just like the railroads, and inherited the retail market, more or less. To have a great bubble, you have to have decent economic times. The better off, the better the bubble. You have to have easy money. The better and easier, et cetera, the better the bubble. And you have to have a fabulous idea.
And you have to have it so obviously be important that everybody can see it. Now, they're very, very rare events, aren't they? This one is as big as anything but the railroads. I am not even prepared to say it isn't bigger than the railroads. It may be, but they're the two super champs. Besides them, I think the internet is a bit of a piker, but they're the two colossal ones.
If ever there was a massive idea that will change, is already changing the world, it's AI. Does anyone not know that? I think everybody knows it. Does anyone want to put their money in it? I think SpaceX, et cetera, gives us a pretty good idea.
90% of the value, if you read the prospectus, is based on AI, even though that particular AI seems to be having its bottom kicked by two or three others as we sit, but wouldn't let facts get in the way of a really good story. And this is an absolute classic. It checks. Everything off, one after another, which haven't been checked off many times in history. So this is it.
If you think this is not a bubble, you are going to be in for a bitter disappointment.
In your book, you talk about how competitive you were and growing up and wanting to play all different types of games. How do you channel competitiveness in a productive manner career-wise so that it doesn't hinder you or it doesn't make you chase performance or doesn't make you worry about one year's performance versus another competitor's?
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Chapter 8: What are Grantham's thoughts on the future of AI and its implications for society?
than the other guy. And what you quickly realize when you do that is that no one else is even trying. So this is not a fair fight. Everybody is focused on the near term. And if you want to profit maximize, that's not a bad idea. And very few people are attempting to be in the market and simultaneously asking questions that are several years out and even, to some extent, a decade or two out.
So it's been very easy for me to be both competitive and cheerful and often wrong.
Since we're talking about career development now, I suppose, is it important when you're a perma bear or more accurately, when you're perceived to be a perma bear, to distinguish yourself in some way from other bears who are out there? Because again, at this particular moment in time, there are a number of high profile commentators who would say that AI is is a bubble.
So how do you actually stand out from, I guess, the bubble calling crowd?
Yeah, I've no idea. I have only made two unmitigated, bullish calls. The market has a really hard time telling the difference between, hey, this is overpriced. This is going to make you less money over the next 20 years than it would do if it was half-priced. They're just kind of mathematical realities. And because you say that, they, oh, you said... the market was going to collapse.
You have been bearish forever. Now, when I want to be really bearish and recommend you get out of the market, I say so. And I've only done that twice. On July the 15th, 2008, I wrote a quarterly letter which actually said, abandon ship, sauve-keeper, the French equivalent, and actually quoted the nursery rhyme, don't be brave, run away, live to fight another day.
Do not take any risk you don't have to take. We all have restrictions on how much we can get out of the risk-taking business. But do not take anything you don't have to. OK? That was pretty clear. And the last thing that we had been bullish about was emerging markets. And I said, I've changed our mind. We think this is the end of the line. sell any emerging that you can.
And we did the biggest trade that we had ever done, getting rid of the last of our emerging, I must say, shortly before we published the letter.
What year, sorry, which year was that? 2008, right?
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