Monday, April 18, 2011

Grantham on Small Cap Stocks

I don't often find forecasts to be all that useful, but GMO's 7-year forecasts* for certain asset classes hasn't been a bad way to gauge which assets might be generally overvalued/undervalued. Ultimately, at least for myself, it still comes down to finding good individual businesses that are cheap.

GMO's Jeremy Grantham's latest warning is to watch out for small caps. In this MarketWatch article, he makes the following points:

- Small-cap stocks will do poorly. They'll likely lose something like a fifth their value in real terms over the next seven years.
- Buying assets when they are expensive in the hope of selling them at a higher price is basically just gambling.

GMO' currently has U.S. High Quality and Managed Timber performing relatively well though still lower than U.S. historic equity returns.

It's worth noting that GMO's forecasts are made on a real basis. Their recent long-term inflation assumption has been 2.5 percent. That's where owning higher quality businesses might be a big advantage. An enterprise with sustainable competitive advantages and pricing power offer some protection against what might be a more challenging than expected inflation environment.


* Here's an example of GMO's 7-year forecasts for certain asset classes as of December 31, 2010. Their more recent forecasts can be viewed on GMO's website (registration required).

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