Jeremy Grantham: Overweight High Quality Companies, Heavily Underweight Low Quality ~ market folly

Thursday, October 28, 2010

Jeremy Grantham: Overweight High Quality Companies, Heavily Underweight Low Quality

GMO's Jeremy Grantham is out with his latest market commentary entitled, 'Night of the Living Fed.' In his previous pieces, Grantham has advocated buying high quality stocks. Oaktree Capital's Howard Marks shares this sentiment and many other hedge funds own large cap blue-chips. What's his stance nowadays?


This time around, Grantham again extols the benefits of quality US companies which he deems "still cheap in an overpriced world." He likes being long high quality and underweight low quality stocks. Regarding emerging market equities, Grantham feels investors should be moderately overweight while moderately underweight the rest of the world.

Grantham also mentions that stocks as a whole are currently overpriced. At the same time, he notes that bonds are even less attractive. The debate of buying overpriced stocks versus even more overpriced bonds is one he plans to address further in the future. Lastly, he advises extra cash reserves, citing a volatile market with insecure fundamentals.

Federal Reserve

In his latest commentary, Grantham shifts his focus to the Federal Reserve. He pens a decisively anti-Fed piece that critiques and criticizes the various maneuvers they've made. Some of his more salient points include:

- Low interest rates almost always transfer wealth from debt owners/retirees to corporations and the financial industry.

- Quantitative easing, he says, is more of a desperate move than just a low interest rate policy.

- At the same token, these lower rates encourage speculation in markets (emphasis on speculation rather than investment).

Embedded below is Grantham's latest piece from GMO which we recommend reading in its entirety:

You can download a .pdf copy here.

We've posted a ton of additional great market commentary as of late including Lee Ainslie & hedge fund Maverick Capital's latest letter, Corsair Capital's latest investment ideas, as well as East Coast Asset Management's take on the joys of compounding. Like Grantham, many of these managers are finding compelling opportunities in select equities.

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