Stocks A to Z / Stocks B / Berkshire Hathaway (BRK.A)
No. of Recommendations: 8
Well, that's the thinking behind this chart.
https://www.gmo.com/contentassets/e116b5c3b8c24a1f...I'm sure many of you have seen these before, this is just the latest edition, for asset prices at May 31.
It's not good as a prediction of the market direction any time soon, but it's an excellent source of a sane assumption of returns in the next several years: what you'll get if valuation levels are their historically usual levels seven years after purchase. Their forecast from 2000 turned out preposterously accurate, but that was mostly luck...there is no magic law that says assets will be typically valued at typical levels a specific amount of time in the future.
I think their expectation for large cap US stocks has been too low pretty frequently in the last decade or two, in part I think because they use deeper history than I do when trying to estimate what a "normal" valuation level is.
Jim
No. of Recommendations: 6
A few years ago, I took a look at how well GMO's asset forecasts predicted asset returns 7 years later. I was looking at more recent results than 2000, but came away rather disheartened.
I just sought out one from ~7 years ago and came across the one below dated Jan 2017. It predicted US stocks return around -3%/yr for the 7 years ending Jan 2024 (-20% ROI) and the best performing asset class to be emerging markets at +4%/yr (+32% ROI).
GMO forecast from 2017:
https://theotrade.com/wp-content/uploads/2017/02/g...And the one below from 7 years prior in 2010 also seemed to miss the mark significantly, forecasting negative US market returns for small/large caps by 2017. Emerging markets forecast was 4.7%/yr or 31% ROI which was also majorly off, at least as measured by EEM.
GMO forecast from 2010:
https://www.mymoneyblog.com/images/1005/gmo1.gifJim, do you still have confidence in GMO's approach despite its fairly dismal track record over the last ~15 years? Is it your opinion that the underlying basis for their estimate methodology is sound, and that it's likely to return to being a decent predictor of medium-long term returns again if valuation multiples someday stop their seemingly endless expansion?
I should add, this "going off the rails" with the forecasts doesn't seem to be unique to GMO's. I believe Vanguard's, SSGA's, and Aimco's similar long term forecasts also missed the market in recent years. AS one example, I recall all were very optimistic about international/emerging, but none of that optimism has come to fruition.
No. of Recommendations: 7
Jim, do you still have confidence in GMO's approach despite its fairly dismal track record over the last ~15 years? Is it your opinion that the underlying basis for their estimate methodology is sound, and that it's likely to return to being a decent predictor of medium-long term returns again if valuation multiples someday stop their seemingly endless expansion?
Absolutely. Provided you remember what it is. It's not a market prediction. Rather, it's the return you should reasonably expect, if valuations are pretty typical at the end date. And nothing super unusual happens*.
As mentioned, I think perhaps they use some history that's old enough that the valuation multiples of that time are perhaps no longer entirely relevant, for a variety of fairly subtle reasons. Corporate profitability truly is higher, and the drag of net share issuance had a step change a while back. So I think the valuations they assume are "normal" might be just a hair conservative.
But yes, I think the methodology is extremely sound. Absent better information (and who has that?) one should expect a typical result. The extent that you expect a different result for a given security should be proportional to the strength and rigour of the evidence you have that the specific security in question is exceptional. If you hear hoof beats, expect horses, not zebras...unless you have a photo out the window that contained a lot of stripes.
Jim
* As an aside, the TCJA was a good example of something pretty unusual and unexpected. The 10 year average of US corporate tax to GDP was a little over 1.9% in the decade to 2000. It's around 1.6% recently. That sounds like a small shift, but it means every dollar of sales is worth 19% more than it was before.
No. of Recommendations: 1
Interesting. Grantham's been a "permabear" for most of my investing lifetime, at least toward the megacap indexes. No idea if his contrarian "anti-trend" funds have done well over the years.
No. of Recommendations: 8
Interesting. Grantham's been a "permabear" for most of my investing lifetime, at least toward the megacap indexes. No idea if his contrarian "anti-trend" funds have done well over the years. Most of his funds haven't been stellar, as I recall. Conservatism will do that. I believe they has a newish non-US small cap fund that's off to a good start.
But it's not quite fair to label him a permabear.
March 2009 bullish note
https://www.gmo.com/americas/research-library/rein...Jan 2018 bullish note
https://www.gmo.com/americas/research-library/brac...That one was not particularly fantastic--the market went up but did not soar--but it's not a bear call.
He even made a claim that "this time is decently different" in 2017, noting that profit margins since 1997 had been 30% higher than the average of the prior 70 years.
And of course, he's been at it a long time...he was very bullish through most of the 1980s and 1990s.
A bigger question is whether it's possible to be an insightful commentator on finance and economics without having a history as a market-beating money manager. I think so. Having dabbled at both, I have an appreciation of the very different skills involved.
Jim
No. of Recommendations: 11
Jim wrote:
A bigger question is whether it's possible to be an insightful commentator on finance and economics without having a history as a market-beating money manager. I think so.I don't think so! The proof is in the pudding!
I took a few minutes to obtain data on all of GMO's funds with a history of twenty years or more and compared their returns to a simple buy the market strategy holding SPY. Only one of their funds beat SPY, and that by only a very small fraction. Like Hussman, whose returns are way, way worse than these, it is one thing to be call the next bear market, but when that call comes years and years before it arrives and you invest in light of that call, by definition you will significantly under-perform the market.
One is better served buying a Vanguard Fund that tracks the S&P 500 at a very low expense ratio.
MULTI-ASSET CLASS Type Symbol Conception Years Begins 6/28/2024 ROI CAGR SPY
Benchmark-Free Allocation Fund Mutual Fund GBMFX 7/23/2003 21.0 $6.56 $26.83 309% 6.95% 10.58%
Global Asset Allocation Fund Mutual Fund GMWAX 10/22/1996 27.7 $9.92 $33.07 233% 4.44% 9.60%
EQUITIES
Climate Change Fund Mutual Fund GCCHX 4/5/2017 7.2
Emerging Markets ex-China Fund Mutual Fund GMOEX 12/9/1993 30.6 $4.06 $25.33 524% 6.17% 10.37%
Emerging Markets Fund Mutual Fund GMAUX 10/18/2021 2.7
Global Developed Equity Allocation Fund Mutual Fund GWOAX 6/16/2005 19.1
Global Equity Allocation Fund Mutual Fund GMGEX 11/26/1996 27.6 $3.30 $28.89 776% 8.18% 9.35%
International Developed Equity Allocation Fund Mutual Fund GIOTX 6/5/2006 18.1
International Equity Allocation Fund Mutual Fund GIEAX 10/11/1996 27.7 $5.15 $29.07 465% 6.44% 9.60%
International Equity Fund Mutual Fund GMOIX 3/31/1987 37.3 $1.79 $24.58 1275% 7.28% 10.59%
International Opportunistic Value Fund Mutual Fund GTMIX 7/29/1998 25.9 $3.37 $14.94 343% 5.91% 8.21%
Quality Cyclicals Fund Mutual Fund GMAEX 5/12/2020 4.1
Quality Fund Mutual Fund GQETX 2/6/2004 20.4 $4.24 $32.97 678% 10.57% 10.06%
Resource Transition Fund Mutual Fund GMOYX 2/15/2023 1.4
Resources Fund Mutual Fund GOFIX 12/28/2011 12.5
Small Cap Quality Fund Mutual Fund GSBGX 9/20/2022 1.8
U.S. Equity Fund Mutual Fund GMUEX 9/18/1985 38.8 $0.23 $14.88 6484% 11.39% 11.65%
U.S. Opportunistic Value Fund Mutual Fund UUOAX 12/13/2022 1.6
U.S. Quality ETF ETF QLTY 12/13/2023 0.6
U.S. Small Cap Value Fund Mutual Fund GCAVX 7/2/2019 5.0
Usonian Japan Value Creation Fund Mutual Fund GMAKX 9/14/2020 3.8
No. of Recommendations: 10
Jim wrote: A bigger question is whether it's possible to be an insightful commentator on finance and economics without having a history as a market-beating money manager. I think so.
...
I don't think so! The proof is in the pudding!
Hmm, I beg to differ. The proof of the pudding is in the eating of the pudding, not in the eating of something else.
I'm not arguing that the fund results are good. But to suggest that someone with a fund return history showing a low CAGR is not able to provide useful and thoughtful commentary on finance and investing is like to suggesting that someone without a #1 hit can't ipso facto be a good songwriter. They are different skills. (and as aside, the second one in each case is dependent on a lot of underappreciated external factors)
His fund performance isn't great. Roughly market tracking 2000-2017, for example, poor but positive since then last I checked. Even bearing in mind that the investment goal is, to paraphrase, primarily not to lose money and to have a decent positive real return consistent with that stance, over the cycle.
But his writing is generally extremely insightful, as a rule. He considers things a lot of people don't, and it's grounded in hard facts and statistics. It's the weighting of the different comments (and the weighting of commercial exigencies) that determines what a fund knowing that advice might do.
Jim
No. of Recommendations: 6
Jim wrote:
Hmm, I beg to differ.I wouldn't expect anything less. :)
What I find sad is that many, like Jeremy, and Hussman, and innumerable others, seem to be able to raise important points, and wax eloquent on the risks inherent in the markets at any particular point in time, but then, with their management, significantly underperform the market itself. It doesn't surprise me. Isn't it somewhere around 90% of all actively management mutual funds and ETFs do the same. They just can't seem to beat SPY.
Jim added:
His fund performance isn't great. Roughly market tracking 2000-2017, for example, poor but positive since then last I checked.SPY has a return from 1/2/2028 to present of 13.45%. The average of his funds that I calculated have a CAGR of 5.7%. This is significant under-performance!
Jim wrote:
But to suggest that someone with a fund return history showing a low CAGR is not able to provide useful and thoughtful commentary on finance and investing...I don't deny that it can provide thought provoking ideas that may cause me to spend a day exploring something I may not have thought of. So useful? Sure. But if a local auto mechanic seems to always be on the side of the road broken down in his own car, I'm much less likely to trust him with my own vehicle.
MULTI-ASSET CLASS Type Symbol Conception Years Begins 6/28/2024 ROI CAGR SPY 2018-2024
Benchmark-Free Allocation Fund Mutual Fund GBMFX 7/23/2003 21.0 $6.56 $26.83 309% 6.95% 10.58% 2.96%
Global Asset Allocation Fund Mutual Fund GMWAX 10/22/1996 27.7 $9.92 $33.07 233% 4.44% 9.60% 4.09%
EQUITIES
Climate Change Fund Mutual Fund GCCHX 4/5/2017 7.2
Emerging Markets ex-China Fund Mutual Fund GMOEX 12/9/1993 30.6 $4.06 $25.33 524% 6.17% 10.37% -0.60%
Emerging Markets Fund Mutual Fund GMAUX 10/18/2021 2.7
Global Developed Equity Allocation Fund Mutual Fund GWOAX 6/16/2005 19.1
Global Equity Allocation Fund Mutual Fund GMGEX 11/26/1996 27.6 $3.30 $28.89 776% 8.18% 9.35% 6.16%
International Developed Equity Allocation Fund Mutual Fund GIOTX 6/5/2006 18.1
International Equity Allocation Fund Mutual Fund GIEAX 10/11/1996 27.7 $5.15 $29.07 465% 6.44% 9.60% 2.84%
International Equity Fund Mutual Fund GMOIX 3/31/1987 37.3 $1.79 $24.58 1275% 7.28% 10.59% 4.93%
International Opportunistic Value Fund Mutual Fund GTMIX 7/29/1998 25.9 $3.37 $14.94 343% 5.91% 8.21% 3.60%
Quality Cyclicals Fund Mutual Fund GMAEX 5/12/2020 4.1
Quality Fund Mutual Fund GQETX 2/6/2004 20.4 $4.24 $32.97 678% 10.57% 10.06% 15.05%
Resource Transition Fund Mutual Fund GMOYX 2/15/2023 1.4
Resources Fund Mutual Fund GOFIX 12/28/2011 12.5
Small Cap Quality Fund Mutual Fund GSBGX 9/20/2022 1.8
U.S. Equity Fund Mutual Fund GMUEX 9/18/1985 38.8 $0.23 $14.88 6484% 11.39% 11.65% 12.25%
U.S. Opportunistic Value Fund Mutual Fund UUOAX 12/13/2022 1.6
U.S. Quality ETF ETF QLTY 12/13/2023 0.6
U.S. Small Cap Value Fund Mutual Fund GCAVX 7/2/2019 5.0
Usonian Japan Value Creation Fund Mutual Fund GMAKX 9/14/2020 3.8
SPY 13.45%
No. of Recommendations: 4
SPY has a return from 1/2/2028 to present of 13.45%. The average of his funds that I calculated have a CAGR of 5.7%. This is significant under-performance!
I was using figures from another source, which I didn't verify. I believe were from "GMO Benchmark-Free Allocation IV", whose history is available as GBMBX.
1997-2021 inclusive, fund CAGR 6.97% versus S&P 8.95%.
Most of the gap was 1997-1998 when the S&P soared.
For 1999-2021 inclusive, 23 years, the difference was CAGR 0.18%.
I didn't verify the appropriateness of the specific fund chosen or figures used.
Of note for his particular style of conservatism, the worst three-calendar-year stretch for the S&P in those 25 years was -37.6%, versus his fund at -1.9%. I think that's a better thing to look at for risk-adjusted returns than monthly price volatility which matters to no-one.
His flagship fund has not outperformed the cap weight US market, at least for stretches ending lately.
But my point remains: that's an entirely different question from whether his commentary, particularly the asset class expectations tables, offers valuable insights.
e.g., from a 2008 article in the Economist:
"TEN years ago, GMO, an American fund-management group, was losing clients. GMO was sceptical about the dotcom boom and thought that equities offered poor value. Its performance lagged that of other groups who appeared to be more in tune with the “new paradigm” of the late 1990s.
"At the time, GMO forecasted likely future levels of returns from ten separate asset classes. Emerging-market equities came first, followed by American real-estate investment trusts, emerging-country debt, international smallcaps, index-linked Treasury bonds, American government bonds, EAFE (Europe, Australia and far east) equities, Treasury bills, overseas bonds and the S&P 500 index (American equities).
"Remarkably, ten years later that prediction was proved almost entirely correct, from 13.4% real for emerging market equities all the way down to 0% real for American equities. The only differences were that foreign bonds and Treasury bills swapped places, as did government bonds and EAFE stocks.
"The chances of getting that forecast exactly right were less than one in 500,000. Does this suggest that GMO's fund managers are exceptionally lucky? Perhaps. But it also suggests that long-term market movements may be rather easier to predict than short-term ones. In the short-term, markets can be pushed to extremes, and thus away from fundamental values, by fear and greed. But bubbles don't tend to last for a decade."
A similar article in 2011:
"As an illustration. Grantham shows what the model was forecasting for asset classes back in December 2001. Emerging markets were the asset to back, it claimed back then, while US equities should be avoided. Sure enough, emerging market equities were the best performers out of the 11 asset classes analysed over the following 10 years, while the S&P 500 was 10th."
Such an analysis won't generally be right, because there is no guarantee (or even particular likelihood) that the asset classes in question will be at their own respective typical valuation levels at the end of a single specific length of time. But, critically, if they are, it's not so hard to have a pretty good idea of what returns to expect, so it's very useful information.
Sometimes a call is a pretty easy one. From 2008: "Mr Grantham admits he will probably fall foul of the Curse of the Value Investor, which is buying too soon. Yet he is convinced that “by October 10th global equities were cheap on an absolute basis and cheaper than at any time in 20 years.”"
Over the next 10 years, S&P total return was 14.2%/year and equal weight was 15.3%. Good numbers. I take the lesson: when someone with a reputation (deserved or not) of being a permabear makes a bullish call, it's probably not a bad call. They are really pounding the drum for emerging market value stocks lately.
In honour of that notion, FWIW here are some random international picks of mine
IFI:WSE at 23.90 PLN, yield 8.41%
KMDS:JKT at 458 IDR, yield 4.73%
6070:TYO at 2493 JPY, yield 4.79%
4481:TYO at 2815 JPY, yield 3.21%
(even though Japan isn't exactly an emerging market!)
They are pretty bullish about some specific mainstream US stocks too, based on their observation that the dispersion of valuations recently has been way higher than normal.
Jim
No. of Recommendations: 5
Jim wrote: I take the lesson: when someone with a reputation (deserved or not) of being a permabear makes a bullish call, it's probably not a bad call.
If/when I'm aware of their bullish call I most definitely am more inclined to pay attention.
Economist Article stated: TEN years ago, GMO, an American fund-management group, was losing clients. GMO was sceptical about the dotcom boom and thought that equities offered poor value. Its performance lagged that of other groups who appeared to be more in tune with the “new paradigm” of the late 1990s.
The stock market is bullish 70% of the time no matter how you slice it. The problem I have with those who lean toward being a Permabear is that many individual investors listen to them and remain out of the market, or invested in asset classes that significantly underperform the market. The American economy, and by extension, the stock market keeps pressing forward while they remain at the station fearing to get on the train.
I'm with Warren Buffet on this. Here are a few of his quotes:
I bought my first stock in 1942, in the summer of '42. I was 11 years old. And so 75 years have gone by. And I have never known what the market's going to do the next day. And that's not my game. My game is to decide whether I'm in the right economy, which America's definitely been ever since that time. The Dow has gone from 100 to 21,000 during that time. And no matter what the headlines say, or terrible things are happening - we were losing the war in the Pacific when I first bought stocks.
It’s always been a mistake to bet against America, since 1776.
And those who are continuously spouting off about the market being over-valued and stocks being a huge risk are doing just that!
Of course, I'm a strong believer in identifying periods of time when risk is high and it is best to be defensive. It is very, very hard to recoup a fifty percent drop in one's portfolio! But this warning comes around rarely. Certainly no more than 30% of the time, not 100% as many of these prognosticators tend to be!
No. of Recommendations: 2
Thinking about Warren this afternoon got me reading the annual letter again and this paragraph stood out to me:
I can’t remember a period since March 11, 1942 – the date of my first stock purchase – that
I have not had a majority of my net worth in equities, U.S.-based equities. And so far, so good.
The Dow Jones Industrial Average fell below 100 on that fateful day in 1942 when I “pulled the
trigger.” I was down about $5 by the time school was out. Soon, things turned around and now that
index hovers around 38,000. America has been a terrific country for investors. All they have
needed to do is sit quietly, listening to no one.
As one of my wife's foreign classmates used to say - Lest I beat the bush... - I'm irritated by the Permabears that continually create fear and panic in the investing public and get them to do the opposite of what Warren has done since since he was eleven years old!
No. of Recommendations: 0
And so far, so good.
The Dow Jones Industrial Average fell below 100 on that fateful day in 1942 when I “pulled the
trigger.” I was down about $5 by the time school was out. Soon, things turned around and now that
index hovers around 38,000
And the index should be about 14,000,000 in 2105!
Mark
No. of Recommendations: 10
I'm with Warren Buffet on this. Here are a few of his quotes:
I bought my first stock in 1942, in the summer of '42. I was 11 years old. And so 75 years have gone by. And I have never known what the market's going to do the next day. And that's not my game. My game is to decide whether I'm in the right economy, which America's definitely been ever since that time. The Dow has gone from 100 to 21,000 during that time. And no matter what the headlines say, or terrible things are happening - we were losing the war in the Pacific when I first bought stocks.
It’s always been a mistake to bet against America, since 1776.Certainly a fine quote, but that's a very general statement about US investments. It's a great country for investors : )
But I think in this particular instance the salient message is a different one: that if you buy your investments at a high price, you'll get a lower rate of return. What has Mr Buffett had to say about that?
In an article in Fortune in November 1999, Mr Buffett made pretty much the exact same reasoning as GMO did in the link in the top post.
Full article here
https://www.berkshirehathaway.com/1999ar/FortuneMa...The core quote is is prediction that the next 17 years (1999-2016) could not offer returns anything like the 17 years just ended (1982-1999 real total return 14.80%/year).
"Let me summarize what I've been saying about the stock market: I think it's very hard to come up with a persuasive case that equities will over the next 17 years perform anything like—anything like—they've performed in the past 17. If I had to pick the most probable return, from appreciation and dividends combined, that investors in aggregate—repeat, aggregate—would earn in a world of constant interest rates, 2% inflation, and those ever hurtful frictional costs, it would be 6%. If you strip out the inflation component from this nominal return (which you would need to do however inflation fluctuates), that's 4% in real terms. And if 4% is wrong, I believe that the percentage is just as likely to be less as more."It's hard to overemphasize how radically low his "real 4%" prediction seemed to most observers at the time. A substantial fraction of investors were expecting something like 20% a year to be normal.
Since this was more than 17 years ago, we know how things turned out. The S&P 500 real total return in the 17 years after the publication date was 2.42%/year, or about 1.58%/year lower than his guess.
It's not that either GMO or Mr Buffett are making market predictions as such. They shouldn't be vilified when these comments don't turn out to have been prophetic, nor lionized when they do. They're just observing the obvious: entry prices matter. If you pay twice as much for anything, you'll get half the return on your dollar. And vice versa, of course. Valuations might be normal or abnormal at any given single future date, but for a very broad asset class the likely rate of return is surprisingly predictable for any ending date that has roughly "normal" valuations.
The US economy is going to grow only so fast in the next 10 years. That number is bounded to a pretty small range. Only so much of that is going to end up as corporate sales of US firms, and only so much of *that* is going to end up as net corporate profits, and (if it's an average valuation day) investors in the future will pay only so much for that level of aggregate earnings. The specifics are unknown, but the broad strokes are fairly bounded.
Jim
No. of Recommendations: 2
The US, Sweden and Switzerland had the best performing stock markets 1900-2000.
No. of Recommendations: 8
The US, Sweden and Switzerland had the best performing stock markets 1900-2000.
As an unrelated aside, I once read a fairly serious paper which attempted to explain historical excess equity returns (the "equity premium puzzle") very simply: most analysis is done on the US market, but that doesn't take into account survivorship bias of stock markets themselves. Most stock markets that existed in the late 19th century have completely closed at some point, usually as a total loss for shareholders. By performing an analysis of one that survived (so far), the overall sample is very skewed to the positive. An interesting result that goes along with that is that the average valuation multiple of a given stock market is somewhat correlated with how long the stock market has been continuously operating: people are more willing to believe it will stick around.
Jim
No. of Recommendations: 6
I'm irritated by the Permabears
Why be irritated? They're creating opportunities. For you to profit from making the right call, someone else has to be making the wrong call. (And no, it's not a zero sum game, but that's what happens at the margin).
Elan
No. of Recommendations: 4
Elan asked: Why be irritated? They're creating opportunities.
You are right. Their continuous bearish calls are in some measure to my advantage. They exaggerate market moves, and my research is all about identifying those exaggerations.
Having said that, however, I see it not too dissimilar from someone addicted to drugs, alcohol, gambling or anything else, they want everyone around them to be absorbed in the same thing. It is a fact of human nature. The more everyone else around them is experiencing the same mediocre returns the better they feel about their own sub-par returns. I'm irritated simply because I'm sympathetic to the individual investor being sucked into such things!
No. of Recommendations: 0
I have one quick point to add to this. I went to a lecture many many years ago, and they talked about how emerging markets were always supposed to do well, and never have. I just looked at 1 years of data for VWO. 5% per year.
No. of Recommendations: 2
The US, Sweden and Switzerland had the best performing stock markets 1900-2000.
---
As an unrelated aside, I once read a fairly serious paper which attempted to explain historical excess equity returns (the "equity premium puzzle") very simply: most analysis is done on the US market, but that doesn't take into account survivorship bias of stock markets themselves.
Another paraphrase: avoid investing in war zones.
DB2
No. of Recommendations: 5
Another paraphrase: avoid investing in war zones.
Well, sure. Ferengi rule of acquisition #34.
But this advice does present a conundrum: if you have a crystal ball able to forecast where that will happen, you might as well just use the crystal ball to find out future stock prices too.
After all, certain very large countries in North America are not immune to civil wars and revolutions. If (if) the chances of something happening are non-zero and not decreasing, it'll definitely happen from time to time.
Jim
No. of Recommendations: 0
Switzerland, Sweden and the US remain atop the Innovators Index ranked by Visual Capitalist.
