The conventional wisdom is that ETFs and other index-tracking vehicles are designed for beta (market exposure) and that active managers pursue alpha (value added through skill). But what does this actually tell us?

Do our well-used Greek letters help us make sense of the investment landscape, or do they actually hamper us in managing money? As James Montier, formerly of Societe Generale’s asset allocation team, now with Boston-based fund manager GMO, pointed out in an article published in 2007, as soon as you use the terms “alpha” and “beta,” you are invoking the spirit of the capital asset pricing model.

And, unfortunately, CAPM doesn’t actually work in practice.

Why not? Apart from some questionable assumptions about frictionless trading and investors having identical goals, the key problem with CAPM is that it assumes that stock returns are normally distributed. In other words, the theory requires that stock prices follow a random walk,

...

Jeremy Grantham has become a familiar and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, the co-founder and chairman of Boston-based GMO has just published the July edition of his quarterly newsletter, entitled Boring Fair Price.

Grantham’s 2Q 2009 letter includes the topics “Boring Fair Price” (or, “Waiting for Markets to be Silly Again”) and “Running Out of Resources”, which looks at slower economic growth in light of the recent financial crisis and dwindling resources.

Grantham starts the newsletter with the following paragraph:

“A year is certainly a long time in markets, and so is a quarter. A year ago, equities globally - and everything else for that matter - were very overpriced, particularly if they were risky.

...

Jeremy Grantham has become a familiar, and very popular face on this site. For those treasuring his insight, wisdom and prescient calls, a fascinating interview with the co-founder and chairman of Boston-based GMO has just crossed my path. It comes in the form of a mega five-part interview recently conducted with the legendary investor.

This interview is not to be missed.

Part I: Grantham on getting back into the market He offers his take on re-entering a market that seems neither too expensive nor too cheap.

Part II: How Grantham defines “high quality” Grantham says to keep it simple when finding top-notch businesses and offers his take on high-quality’s recent lagging performance.

...

BULL - June 1: Deutsche Bank US equity analyst Binky Chadha forecasts S&P 500 at 1060 by 2009 year-end, citing improving corporate profit margins.  He said aggregate profit margins for S&P 500 “remains well below the average of the last few years, implying considerable potential upside over the medium term.”

BULL - June 1: JP Morgan Chase analyst Thomas Lee forecasts 2009 year-end S&P 500 index at 1100.

BULL - June 1: Bank of America/Merrill Lynch analyst David Bianco forecasts 2009 year-end S&P 500 index at 1100.

BEAR - May 30: Morgan Stanley equity analyst Jason Todd says sell this S&P 500 rally. He says Morgan Stanley does not see large upside above 825-850.  He said,  “In the rush to buy a cyclical recovery, it seems earnings or valuation no longer matters. We would be comfortable with this view if the earnings trough was closer, but it is not.”

BEAR - MAY 28: Berkshire

...

The opinions of Jeremy Grantham, veteran investor and founder of Boston-based money-management firm GMO, have been featured regularly in posts on the Investment Postcards blog. Against the background of his general disregard for  conventional wisdom, his turnaround in early March from a perma-bearish stance to a more bullish demeanour was particularly closely followed.

“… be aware that the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle less black than the day before,” he said in March in a newsletter entitled “Reinvesting when terrified“. He also cautioned investors not to fall prey to “terminal paralysis” that often sets in after a financial crisis.

A recent interview by SmartMoney with Grantham provides insight on why he has changed his mind and his prognosis for the future. A

...

Jeremy Grantham’s keenly awaited quarterly newsletter, entitled “The last hurrah and seven lean years”, has just been published. Grantham, who co-founded Boston-based GMO in 1977, covers a lot of thought-provoking ground in this letter, but focuses mostly on where to invest now.

The widely-respected Grantham’s newsletter is must-read material. The first few paragraphs are published below and a link to the full article is provided at the bottom of the post.

“First, let me lament the loss of near certainties in investing. The financial and economic collapse that I described as ‘the most widely predicted surprise in the history of finance’ about 18 months ago is behind us. More precisely, we believed that bubbles had formed in global profit margins, risk premiums, and U.S. and U.K. housing prices, and that all three were ‘near certainties’

...

As the stock market indices are flirting with key charting levels and we are waiting for Mr Market to show his hand, it is useful to get an update on the outlook from Jeremy Grantham.

Grantham, chairman of Boston-based GMO, was a great skeptic between 1999 and October last year when he started propagating “hesitant and careful buying”. His latest thinking has just been reported in an interview with CNN Money as quoted below.

“Meanwhile, GMO chairman Jeremy Grantham is more upbeat - though he does expect more pain to precede any recovery.

“Looking back at historic bear markets, Grantham draws comparisons to 1974 and 1982, when the S&P 500 lost roughly half its value. Since he estimates the current S&P

...

Subsequent to publication of Jeremy Grantham’s quarterly newsletter a few days ago, Steve Forbes conducted a must-see interview with the chairman of Boston-based GMO. The video clip and transcript are published below.

Click here or on the image to view the video.

Click here for the transcript of the interview.

Source: Forbes, January 23, 2009.

In October last year perennial bear Jeremy Grantham, chairman of Boston-based GMO, said: “We are reconciled to buying too soon, but we recognize that our fair value estimate of 975 on the S&P 500 is, from historical precedent, likely to overrun on the downside by 20% to 40%, giving a range of 585 to 780 on the S&P as a probable low.

“The world faces unavoidable declines in economic activity and profit margins, so this overrun is unlikely to be much less painful than average, although you never know your luck.”

Given Grantham’s forecast, it was with keen interest that I have been awaiting his latest quarterly newsletter entitled “

…

strongWall Street Journal and Financial News/strongbr /br /By Jason Corcoranbr /br /15 December 2008 br /br /Fund managers have called the bottom too oftenbr /The investment horizon has experienced so many false dawns over the past 18 months that investors could be forgiven for regarding any rose-tinted outlook as a mirage.br /br /Every time the stock market suffers another steep drop, fund managers and investment sages pronounce that the market bottom is in sight and now is the time to buy.br /br /Fundamentals, technical signs and precedents may have backed up some of their theories but subsequent slumps in valuations have not borne out their views.br /br /Ken Kinsey-Quick, head of multi-manager strategies at UK asset manager Thames River Capital, said: “The problem with predictions is that no one has a perfect crystal ball. Anyone making a prediction is taking a risk which gives them about a 30% chance ...