Jeremy Grantham: Lessons from 60 Legendary Years of Investing

In 2022, after Mag 7 had collapsed, ChatGPT's launch in October 2022 reversed the pattern; AI investment CapEx and animal spirits were so powerful that the Mag 7 rose so much (up 40%+ while S&P fell 25%) that they dragged the S&P up, forestalling what would have been a 40%+ broader market decline over 10 months.

“the S&P tanked. Worst bond market year in history ever. Uh S&P down 25 Mag 7 down 40, growth stocks down 35. And then in um late October or whenever it was um chat GPT comes out. And it didn't stop the rest of the market from being wobbly. Uh they continued to drift off uh for another 10 months, but the Mag 7 went up so much that and they were so big already that they they took the S&P with them.”

Oil price spikes have caused recessions without exception throughout history; oil is a critical fuel for which demand cannot be easily substituted, and the recent 50% oil price increase from the Iran war will create balancing effects (weak markets, reduced demand) and is clearly painful for the economy.

“Obviously, every major move in oil up has caused a recession without exception. Just check it. And we can withstand a lot of things, but we can't easily withstand a massive increase in the price of of a critical fuel. Can't be done.”

The dividend discount model, which measures the fair value ratio of stocks (e.g., 0.79 = 21% cheap, 1.12 = 12% overpriced), is a measuring kit to test investment instincts by aggregating valuations across market segments, revealing that small-cap stocks were very cheap while large-cap stocks were on average very expensive.

“We would uh every every stock would have a dividend discount uh ratio. What ratio of fair value was it? .79 you were you know, 21% cheap. 1.12 you were 12% overpriced and then we'd add them all together and it turned out that the sum of all the small ones was very cheap. The sum of all the big ones on average was very expensive”

Quality as a factor—measured by less debt, higher returns, more stability, and lower bankruptcy risk—is a genuine market inefficiency: quality stocks outperformed by roughly 0.5% per year while bonds show AAA bonds underperform B bonds by ~1% per year, creating a ~1.5% annual 'freebie' inefficiency that academics missed for decades.

“quality has uh less debt, higher returns, more stability, go goes bankrupt less. However you torture the data, you can't persuade anyone that quality is a risk factor. Is The higher the quality, the lower the risk. And yet, quality outperformed. It's outperformed forever. And uh it should be minus a point, right? A year. The AAA bond underperforms, you know, the B bond by about a point a year. And the AAA stock should do the same for the same reason, less risk. And it didn't. It outperformed by about half a percent a year. So, there was a freebie return and an inefficiency of about 1 and 1/2% a year.”

Climate change is now inflicting billion-plus dollars in annual damages through floods, droughts, and fires, occurring so frequently that they may be reducing global GDP growth by approximately 0.5% per annum, with damages expected to worsen over time.

“in the last 2 years, the billion-plus damages, floods and droughts and fires, are so thick and fast that they they may be knocking half a percent off global GDP. And they're getting worse all the time.”

Eisenhower opened his farewell address by thanking both political parties for their 'constant and considerable cooperation,' setting a tone of bipartisan unity that would be unimaginable in modern politics.

“The saddest thing of all is he starts out by thanking both sides of the house for their constant and considerable cooperation. Holy cow. What a great final speech he gave.”

Tariffs and trade wars are undermining the post-war international trade system that drove decades of prosperity, and this unraveling is a structural drag on global growth.

“we've taken wonderful uh post-war growth in international trade and done our best to mess it up with tariffs and trade war.”

The market currently exhibits one of the two or three highest price levels in history despite facing multiple severe headwinds: population bust in Japan, South Korea, and China; accelerating climate damage costing roughly 0.5% of global GDP annually with worsening trends; geopolitical instability with Russia and China simultaneously; active wars in multiple locations; and trade war escalation.

“Has there ever been a more dangerous environment on every level as we began to talk about? Every level, population bust, climate change, geopolitics, trade war, da da da dum, da da da dum, actual live war uh in in uh two or three places. And um things you know, things can get really bad in a real hurry. And and how does the market reflect this? I'll tell you. By having one of the two or three highest price markets in the history of the business.”

Grantham achieved 8% annual outperformance for 9 consecutive years at GMO (his best 9-year run), which doubled money in that period, but this still falls short of Warren Buffett's 50+ year average of ~20% annualized returns, illustrating how exceptional Buffett's record truly is.

“your first nine years at GMO after founding it, you outperformed every single year with an annual outperformance of 8% per annum. Yeah, that's right. 8% per annum. 8% per annum. So, that run of performance, which was, you know, Would have doubled your money, by the way. 8 * 9 is 72. Right. Rule of 72. So, so that run we came those years I just outlined was up to 1987. I that in our best 9 years out of 60 years of trying, I'm sorry, best 9 years. Uh We couldn't quite equal his 45 or 50 year average.”

In 1999, GMO identified the stock market bubble early and adopted a defensive stance, beating long-term pension fund targets by ~7% annually while the market returned ~13%; this underperformance relative to the market caused clients to leave despite solid absolute returns beating benchmarks.

“a client was giving you a lot of grief because you guys had identified the the bubble early and and taken a more anti-risk approach and therefore were underperforming for for a number of years. Although making decent money, by the way. Beating beating the long-term pension fund targets. Um perhaps as much as 7% a year, but the market was uh 13. Right.”

Grantham has read and been influenced by Burton Malkiel's 'Random Walk Down Wall Street,' which asserts the efficient market hypothesis and that there is no information in pricing alone. However, Grantham found Malkiel's argument empirically wrong: the prior year's top 10% performers outperformed by 3-4 percentage points the following year, contradicting the claim of zero information in pricing.

“And I remember when the market efficiency guys were saying there is no information in pricing alone. And the random walk down Wall Street guy, Burton Malkiel. And if the day he said that, you had looked back 20 years, and you had asked the profound quantitative question, 'Hands up who did best last year?' And you took the 10% best, they outperformed by three or four points the following year. Information in pricing alone. He was completely wrong, and provably wrong for for the last 20, 30 years before he said it.”

Geopolitical relationships with Russia and China are simultaneously destabilized; while relationships have been bad historically, having both deteriorated at the same time is 'distinctly uncomfortable' and unusual, creating elevated military and political risk.

“done our best to destabilize geopolitics. Our relationships with Russia, China, and so on. Uh I'm sure they've been worse with one or the other several times, but to have both of them at the same time, this this is distinctly uncomfortable.”

The market does not turn at tops or bottoms when signs of hope appear; it turns when conditions look bleakest but are slightly less bleak than the day before—a counterintuitive pattern that explains why almost nobody picks market extremes.

“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 shade less black than the day before. And and that's very hard to convince yourself of, I guess, in the moment...it accounts for why no one in general picks the bottom or the top. Picks it up or the top for that reason.”

Momentum is a simple-minded but powerful inefficiency that has worked consistently throughout Grantham's career and before: a body in motion tends to stay in motion for a while, which was provably true even 20-30 years before academics claimed markets were efficient.

“momentum is a pretty simple-minded inefficiency. It really shouldn't work. Uh and it's worked as as uh pretty well I'm sure all my investment career and a lot before. And and it still works in many forms. And it just says, you know, a body in motion tends to stay in motion for a while.”

Grantham's investment philosophy is not to predict when bubbles will occur, but to recognize them when they have clearly arrived and identify the cheap alternatives available to hide in when they burst.

“I have to object to predicting. I didn't predict the bubbles. I said that they had arrived when they arrived. But they hadn't arrived yet. predict them coming out of nowhere, that would be that would be very handy. It All I can do is wait until they appear. They always seem pretty darn obvious. And say, 'Look, there it is.'”

Prince's famous statement 'as long as the music is playing, I have to keep dancing' masks a critical refinement: even though forced to keep dancing, managers abandon flaky speculative stocks (like Puma Tech in 1999) in favor of safer blue-chips like Coca-Cola; this flight to quality explains market breadth divergence patterns.

“I think the phenomenon has a lot to do with the Mr. Prince saying, 'Um as long as the music's playing, I've got to keep dancing.' What he didn't add is, 'But I don't have to dance uh with Puma Tech, the most advanced stock in '99. Um the market is so crazy high that even though I've got to keep dancing, I think I'll start dancing with Coca-Cola, thank you. Because come the end of the world, it won't be as painful. If I dance with Puma Tech, I might go out of business completely. And I think that's what causes the phenomenon, and I think it's um probably more right than wrong, and easy enough to understand.”

The strangest condition signaling an approaching bubble burst is when previous high-beta market leaders roll over while the broader market (led by defensive blue chips) continues rising; this phenomenon occurred only in 1929, 1972, and 2000, never in between, and may have recurred in late 2024/early 2025 with the Magnificent Seven rolling over while the broader market held up.

“The strangest condition of all when the previous high beta market leaders turn strongly down yet the market led by blue chips continues strongly up. This very strange condition only happened in 1929, 1972, and 2000 uh and never in between. I guess in the last few months we could say that the Mag 7 has rolled over. And yet the rest of the market has held up quite well. Would would you add late 2025, early 2026 to that list of when that has occurred?”

President Eisenhower's 1961 farewell address warning about the 'military-industrial complex' is rightly famous, but the line warning against mortgaging future generations' 'material assets' and 'political and spiritual heritage' for present convenience is equally profound but rarely quoted.

“as we peer into society's future, we must avoid the impulse to live only for today, plundering for our own ease and convenience the precious resources of tomorrow. We can't mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage.”

Making significant investment returns requires enduring painful interim losses. Investors must have the discipline to hold and increase positions as they move against them (if the fundamental thesis remains intact) because the path to a major bubble requires moving through lower-level bubbles and corrections first (e.g., 2-sigma events occur every 15 years, then you move to 3-sigma 'super colossal' bubbles every 100 years), and the biggest profits come from the final stages when you've already taken 50% losses from your entry point.

“In terms of your investment approach, this quote jumped out to me. We never made tons of money without taking painful losses beforehand. You need to have the confidence to hold your positions when it moves against you and to increase your waiting as it gets more attractive. Value gives you that confidence.”

The feather analogy illustrates the certainty-horizon tradeoff: in a hurricane, feathers are blown unpredictably (some land nearby, some to Maine after days), but one can be absolutely certain they will all eventually hit the ground due to gravity; similarly, value investing guarantees eventual outperformance, though the path and timing are uncertain.

“You stand on the top of a high rise in Miami in a hurricane and with a bag of feathers and you throw them in the air. And and some of them will land within half a minute, you know, a block away. And some of them will be swept up to Maine in in eight days, like some poor um songbird from the Caribbean. They just get caught up and they can't get out. And um but you do know something with absolute confidence about those feathers, every single last one of them. They will all hit the ground...value is a gravitational equivalent. Sooner or later, being cheap has consequences. Being expensive has consequences. And it will eventually wear you down.”

Grantham's 'butterfly' thinking style—letting ideas flit around briefly before returning to them—prevents mental staleness and enhances creativity; hammering earnestly on a single topic is seen as a virtue but actually blocks creative insights.

“I have a hard time spending too long on a a given topic and tend to move on much to the irritation of my colleagues usually onto a slightly different topic or a completely different topic. But the the thing is I'm quite persistent. So after a little bit I come back...anyone who's got any interest in gardening will notice that that is exactly how butterflies work...The worst thing you can do is stay on topic. You know what the topics are. Take some time out, wander around the periphery a bit, come back to the original. And when you come back, your brain is a little open, you have an insight maybe with any luck. And and just do not hammer away. It's seen as a virtue and I think it blocks the creative juices.”

AI will unbalance supply and demand in unprecedented ways: it may replace workers, reduce demand for human labor and consumption, or drive productivity gains with nobody left to consume the output; supply-demand imbalances in commodities (copper, natural gas) cause price extremes, and AI's effect on human employment and consumption is 'infinitely complicated' and will generate new problems regardless of benefits.

“You're now, for the first time I can think of, you you're beginning to play games with the balance between supply and demand of human beings and and and consumption and the marketplace. And that's why no one knows. On paper, you can you can dream about huge productivity gains, but if those people are just sitting on the beach, what is the use of those productivity gains? Anyway, it's it's infinitely complicated and on top of what is already a complicated world other than watch your tail I think there's no material chance that it will overcome the long list of problems. It it will mitigate some, it will be brilliant for some, and it will generate its own its own set of problems.”

Grantham's personal characteristics shaped his investment success: born in 1938 as a Yorkshireman and Quaker, he developed an intuitive understanding that 'cheap is better than expensive,' which became the foundation of his value-focused approach.

“You're a pre-war baby born in 1938. Your family were Quakers and you're a Yorkshireman. And I love how all of those things together you point to gave you the appreciation for finding good value. You wrote that every Yorkshireman worth his salt is born with the natural understanding that cheap is better than expensive. I think that's fair to say.”

Hard work—constantly shoveling in new data and staying busy in spreadsheets—prevents genuine thinking; real thinking requires walking (at convenient speeds) through natural environments, allowing the mind to wander and integrate ideas without the pressure of constant information intake.

“very hard work does get in the way of thinking because you're so busy shoveling in new data, you have little time to really think...It's not typing numbers into a spreadsheet...It's walking across Boston Common and having a shower there before you go there and just thinking, where are we? What's going on? What am I working on? Let the brain travel at a convenient walking speed. And uh see where it goes. I used to reckon that by the time I'd arrived at work in the good old days of which there were maybe about 30, I would I would have um I would have had two or three ideas.”

Jack Bogle deserves credit for the most useful contribution to investment management by developing and persisting with the indexing concept for 30 years through little institutional interest until the logic finally took hold; his achievement of creating an organization whose Christmas bonuses depend on savings delivered to investors—the opposite of industry norms—saved millions of people billions of dollars.

“Jack Bogle gets the medal for doing the most useful thing in the investment business, saving millions of people billions of dollars, perhaps even more. Of course it's Jack Bogle. Because he gritted his teeth and kept driving that idea of indexing through 30 years of little interest and then finally the internal logic at the power of the logic of that idea begins to take over and you know, to have an organization whose Christmas bonuses depend on how much money you save investors. This is a pretty far cry from what everyone else was doing.”

Markets have not become more efficient over time; in fact, the spectacular inefficiencies and bubbles in meme stocks—rising 6x in a year—may be worse now than historically.

“the critical critical question is, are the are the magnificent inefficiencies, the bubbles, uh where ridiculous meme stocks go go up uh six times in in in a year. Are are they more now than they were? Uh I would say if anything a little worse than they ever were.”

Grantham's key to filtering bad ideas quickly was working with Chris Donnell, who could identify fatal flaws in ideas within 20 seconds, allowing a rapid iteration through 10-20 ideas to find one worth serious research; this combination of prolific idea generation plus rapid critique is exceptionally powerful.

“I was blessed with with a colleague, Chris Donnell, who was the only human being who could persuade me that an idea was idiot in about 20 seconds. Uh Ben Enka can do it in a uh 10 minutes or an hour and no one else can do it, period. I'm very hard to convince. But uh Chris could do it so fast that I'd hardly got my brilliant new idea out than I was Oh, God, how obvious. And uh that combination is absolutely formidable, by the way. Have Have someone who's got lots and lots of ideas, mostly really ridiculous or superficial, and one guy who is a idea uh destroyer, who just looks through, points out the fatal fallacy, and and you move on. We would go through 10 or 20 ideas to find one to put into the pile for further research.”

Grantham's 2009 'Reinvesting When Terrified' memo advised investors not to overcome terror (which is rational) but to create a battle plan, any plan, to overcome the paralysis that makes decision-making impossible—a reference to 1974's 'terminal paralysis' where cognitive capacity itself shuts down.

“Reinvesting when terrified...It wasn't that I was arguing with that terror. It was that I knew that terror from 19 74 where merely getting your body to work was hard, you know, left foot forward, right foot oh god. And we called it terminal paralysis. The market was so bad, so crushing, that you could hardly think, let alone have a battle plan. And we were beginning to get like that. In in '09, so get a battle plan, I argued. Doesn't matter if it's a bad plan, but any plan will be better than paralysis.”

Large financial corporations (Goldman Sachs, JP Morgan, Morgan Stanley) will never publicly warn investors to exit overpriced markets because their business model requires constant optimism; therefore, if no serious financial institution is warning of a crash, this is not evidence the market is fairly priced—it simply reflects institutional incentives to always say everything is fine.

“It's not a business strategy. Any big corporation in finance has to tell you that everything is fine all the time. And and go over the cliff together. And then make as much money as they can sorting things out. And that's what they do. You will never have the Goldman's, JP Morgan's, Morgan Stanley's are never going to tell you to get your tail out of the market because it's dreadfully overpriced. And they can see that it's dreadfully overpriced. So dear viewer, do not think because no one serious is telling to sell out that this means the market is reasonably priced. It simply does not.”

Grantham has successfully timed market extremes only once in a lifetime (the 2009 bottom call), which he notes is the correct frequency for this skill—'one or two lifetimes' to get a major call right—and he is satisfied having achieved this once.

“I say in the book that this is the kind of thing you get right every one or two lifetimes. And I get one, which is reinvesting them terrified. I'm very happy to have one. I didn't expect any more.”

In 2000, the market top offered many places to hide in cheap alternatives (REITs yielding 9% vs S&P yield of 1.6%, inflation-linked bonds at 4%, value stocks, etc.), but in 2008 housing bubble, nearly nowhere was cheap because everything risky was overpriced; the current 2024-2025 market is intermediate, more like 2000, with cheap international, emerging market, and non-US equities available.

“2000 was wonderful because it gave you many places to hide. The REITs, real estate sold it at a discount to building the building. REITs sold at a discount to the properties they had bought. They yield that 9%, you must be joking. Right at the top of the market when the S&P was down to a yield of 1.6, which had never seen such a low level even in 1929. And and there it was. I mean, small cap was was cheap...the housing bubble of 2007, almost nowhere to hide. That was a a risk bubble. Everything risky was overpriced. There were no obviously cheap assets...Now, this one is in the middle. This is the this is happily quite like uh 2000.”

Jack Bogle credits Jeremy Grantham with co-developing the concept of indexing before Bogle popularized it, specifically alongside Dean LeBaron, demonstrating that the idea had multiple intellectual parents.

“Jack Bogle credits you, which I was hold my hands up unaware of the impact you came up with the idea of indexing before him... with Dean LeBaron.”