What If Jeremy Grantham is Right?

by Alexander Green, Chief Investment Strategist

Jeremy Grantham, president of investment management firm GMO LLC, has been getting a lot of press lately.

At the market’s top, he warned of an impending bear market. At the bottom in March, he forecast a historic rally. Today, he says the market is 25% overvalued.

Should you be worried? Perhaps not.

Let’s start with Grantham’s track record. He’s made a couple of good calls lately. But does he get it right all the time? Of course not. No one does.

But even if he’s right, it wouldn’t necessarily be negative. It all depends on your time horizon. Here’s why…

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Financial Week, November 2, 2008

Jeremy Grantham, chairman of Boston-based GMO LLC and a renowned wet blanket in the face of irrational exuberance, sounds uncharacteristically giddy these days.

… equity markets are “below trend lines” for the first time since 1994.

… CFOs should phase back into equities “with all deliberate slowness, as opposed to all deliberate speed,” Mr. Grantham warned, noting that markets typically overshoot on the downside by 20% or more.

… He predicted that the scars from the current downturn will be long lasting, and the effect on the money management industry profound. “A very substantial fraction of a generation of investors” is likely to be leery of stocks, just as they were in the 1930s, “40s and “50s, and again for most of the “70s, he said.

This is “truly the end of an era, and almost everything will be re-evaluated,” from interest