Investment U
HomeArchivesThe ExpertsReportsTools of the TradeRetirement Planning
July 20, 2008

Jeremy Grantham

The Investment U E-Letter: Issue # 306
Tuesday, January 20, 2004

Jeremy Grantham: Where to Invest…When There's No Place to Hide
By Dr. Steve Sjuggerud, President, Investment U

"Today we have substantially the worst prospects for long-term global investment returns of my 35-year career when all asset classes are considered, particularly for U.S.-centric investors. The asset classes collectively are simply the most overpriced they have been. There are no large categories that are good hiding places…" -- Wall Street Legend Jeremy Grantham, in his most recent report to his investors on where to invest.

Jeremy Grantham is right. There are very few places to hide when you consider where to invest today. Nobody wants to hear negativity. But I don't see my thoughts as negativity… I see them as reality. (More on Grantham and his investment thoughts below). 

Back at the peak in 2000, some still knew where to invest because there were still places to hide. For readers of my newsletter, I had recommended real estate and related stocks (REITs, homebuilders, etc.). We all know what real estate has done in the last four years.

I'd also recommended several income ideas, which were once-in-a-generation opportunities, and they've performed even better than I could have imagined.

But now, in 2004, the pickin's are slim… So slim that the most profitable investment approach now might simply be… Ride the markets as long as they continue surging. But do so like someone who understands that they are overvalued - and that they will correct themselves.

Let me explain…

Looking for Value Worldwide… With History as Our Guide

We've got interest rates at multi-generation lows… so you shouldn't leave your money in the bank… or should you? What else can you do with it?  Take your pick on where to invest: You can buy overpriced stocks, overpriced bonds, or overpriced real estate.

In times like these, Richard Russell (who's been writing an investment newsletter for over 40 years) says, "He who loses the least, wins."

In short, when you look around the world, there isn't much value to be found in stocks. Let's look at the U.S., and then we'll look at the Hong Kong market, as a proxy for emerging markets and China.

The most basic valuation measure is the price-to-earnings ratio. It's a rough gauge of how much you're paying for an investment versus what you're getting back in return. In simple terms, if you can earn $10,000 in rent on a house (net), and the price of that house is $150,000, then that house is selling for 15 times annual earnings. At 10 times earnings, or less, that house might be very cheap. At 20 times earnings, it's probably very expensive.

The same is true for stocks. Throughout history, stocks have traded for roughly 15 times earnings. A stock market P/E ratio of 10 or less has proven to be cheap, and a great buy. Meanwhile, a P/E of 20 or higher has been an early-warning sign of tough times ahead.

Let's consider the P/E ratios of U.S. stocks and Hong Kong stocks in recent years:

U.S. Stocks

P/E

Year

8

1982, a great time to have bought, in hindsight

22

1987, before The Crash, a good time to have sold, in hindsight

14

1990

32

March of 2000, a good time to have sold, in hindsight

28

Today

Hong Kong Stocks (notice how a similar picture to U.S. stocks emerges)

P/E

Year

6

1982, a great time to have bought

23

1987, before The Crash, a good time to have sold

10

1990

23

1993, China-related stocks crashed for 10 years

28

March of 2000, a good time to have sold

19

Today

As you can see above, the P/E in the U.S. is 28 - nearly twice the historical average. That's expensive. The downside risk may be greater than the upside potential over the coming years. Hong Kong is less expensive than the U.S., at a P/E of 18. But then again, emerging markets have traditionally traded cheaper than their U.S. counterparts, as they are higher-risk investments.

It's not just the U.S. and Hong Kong that are expensive. The entire world of stocks is expensive (with the exception of Russia - but the risk is so high, it may be appropriately priced). See for yourself at the end of this e-letter, where I've included P/E ratios of the world's major stock indexes. Don't miss it!

Sign up for the free Investment U e-letter

Jeremy Grantham on How To Survive the Toughest Investing Environment in 35 Years:

So 35-year investment legend Jeremy Grantham is probably right. Investments out there are expensive. This may be the toughest environment to invest in during his 35-year career. As we can see in today's letter, there are few, if any, places to hide in stocks worldwide. Be careful in stocks for the next few years.

"Only the huge, politically-driven stimulus gives cause for hope, and that is for a short-term reprieve or rather a 'stay of execution,' " Grantham concludes. Translation: Stocks, bonds and real estate could all push higher, as people look for a place to put their money. But where to invest from there?

In future letters, we'll continue to talk about alternative investment opportunities outside the stock market, as stocks may not produce outstanding returns over the next decade. Yet another reason to keep reading…

Today's IU Cribsheet

  • To read Jeremy Grantham's full commentary, go to www.gmo.com and click on Research and Commentary, and then read "The Greatest Sucker's Rally in History?"

Good investing,

Steve

P.S. As I wrote in today's letter, there are literally no bargains to be found in the major markets of the world right now.

Following are P/E ratios of the major stock market indexes around the world (keep in mind that a P/E of 10 or less is considered a bargain)…

The Americas:
28 S&P 500
126 NASDAQ
21 CANADA
28 BRAZIL
16 MEXICO

Europe:
62 UK
21 FRANCE
61 GERMANY
44 SWITZERLAND
27 ITALY
19 SPAIN
20 NETHERLANDS
32 SWEDEN
22 FINLAND

Emerging Europe / Africa:
8 RUSSIA
17 SOUTH AFRICA
21 GREECE
31 POLAND

Asia Pacific:
111 JAPAN
20 HONG KONG
21 AUSTRALIA
50 CHINA (SHANGHAI)
41 CHINA (SHENZHEN)
44 TAIWAN
18 INDIA
23 SINGAPORE
17 MALAYSIA
27 THAILAND
17 INDONESIA
23 NEW ZEALAND
24 PHILIPPINES

Related Articles:

Investment U Archives

We Value Your Privacy

Search Investment U

Full Index of IU Articles and Free Reports



Learn More About The Oxford Club

Investment U is the educational arm of The Oxford Club - one of the world's most distinguished investor networks, with a long track record of success. The Hulbert Financial Digest recently ranked the Club's twice-monthly Communiqué one of the Top 10 investment newsletters nationwide, based on performance. Overall, the Club's portfolios rank 3rd for five-year, risk-adjusted return. Learn how to become a member of The Oxford Club for as little as $79.
RSS Feed

The Investment U RSS News Feed!
The Investment U RSS Feed

The Road Map to A Rich Life
The Road Map to a Rich Life

The IU RSS Feed Powered by FeedBurner
What Is RSS?

Recommendations


Conferences

SEE THE FULL LIST OF IU
EVENTS & CONFERENCES

Investment Books

Visit the Investment U Book Store to see what the experts are reading. 


Home | About IU | Investment U Archives | Investment Research Reports | IU Resources | Site Map

Copyright © 1999 - 2008 by The Oxford Club, L.L.C
Contact Information  -  Privacy Policy  -  Disclaimer  - Public Relations  - Link to Us

Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation.  No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.