March 2009
...
Every decline will enhance the beauty of cash until, as some of us
experienced in 1974, âterminal paralysisâ sets in. Those
who were over invested will be catatonic and just sit and
pray. Those few who look brilliant, oozing cash, will not
want to easily give up their brilliance. So almost everyone
is watching and waiting with their inertia beginning to set
like concrete. Typically, those with a lot of cash will miss
a very large chunk of the market recovery.
There is only one cure for terminal paralysis: you
absolutely must have a battle plan for reinvestment and
stick to it. Since every action must overcome paralysis,
what I recommend is a few large steps, not many small
ones. A single giant step at the low would be nice, but
without holding a signed contract with the devil, several
big moves would be safer. This is what we have been
doing at GMO. We made one very large reinvestment
move in October, taking us to about half way between
neutral and minimum equities, and we have a schedule
for further moves contingent on future market declines. It
is particularly important to have a clear defi nition of what
it will take for you to be fully invested. Without a similar
program, be prepared for your committeeâs enthusiasm
to invest (and your own for that matter) to fall with
the market. You must get them to agree now â quickly
before rigor mortis sets in â for we are entering that zone
as I write. Remember that you will never catch the low.
Sensible value-based investors will always sell too early
in bubbles and buy too early in busts. But in return, you
may make some important extra money on the roundtrip
as well as lowering the average risk exposure.
For the record, we now believe the S&P is worth 900 at
fair value . Global equities
are even cheaper. (Our estimates of current value are
based on the assumption of normal P/Es being applied to
normal profi t margins.) Our 7-year estimated returns for
the various equity categories are in the +10 to +13% range
after infl ation based on an assumption of a 7-year move
from todayâs environment back to normal conditions.
....
http://www.gmo.com/websitecontent/JG_ReinvestingWhenTerrified.pdf
...
Every decline will enhance the beauty of cash until, as some of us
experienced in 1974, âterminal paralysisâ sets in. Those
who were over invested will be catatonic and just sit and
pray. Those few who look brilliant, oozing cash, will not
want to easily give up their brilliance. So almost everyone
is watching and waiting with their inertia beginning to set
like concrete. Typically, those with a lot of cash will miss
a very large chunk of the market recovery.
There is only one cure for terminal paralysis: you
absolutely must have a battle plan for reinvestment and
stick to it. Since every action must overcome paralysis,
what I recommend is a few large steps, not many small
ones. A single giant step at the low would be nice, but
without holding a signed contract with the devil, several
big moves would be safer. This is what we have been
doing at GMO. We made one very large reinvestment
move in October, taking us to about half way between
neutral and minimum equities, and we have a schedule
for further moves contingent on future market declines. It
is particularly important to have a clear defi nition of what
it will take for you to be fully invested. Without a similar
program, be prepared for your committeeâs enthusiasm
to invest (and your own for that matter) to fall with
the market. You must get them to agree now â quickly
before rigor mortis sets in â for we are entering that zone
as I write. Remember that you will never catch the low.
Sensible value-based investors will always sell too early
in bubbles and buy too early in busts. But in return, you
may make some important extra money on the roundtrip
as well as lowering the average risk exposure.
For the record, we now believe the S&P is worth 900 at
fair value . Global equities
are even cheaper. (Our estimates of current value are
based on the assumption of normal P/Es being applied to
normal profi t margins.) Our 7-year estimated returns for
the various equity categories are in the +10 to +13% range
after infl ation based on an assumption of a 7-year move
from todayâs environment back to normal conditions.
....
http://www.gmo.com/websitecontent/JG_ReinvestingWhenTerrified.pdf