Jeremy Grantham, chairman of US investment manager GMO, has been described as a ‘perma-bear’, and was among the first pundits to warn about the credit crisis in 2005. Yet this month he became one of many respected value investors, including Warren Buffett and Fidelity’s former star fund-manager Anthony Bolton, to declare that stocks look cheap. So is it time to pile back into the markets?
Not so fast. Grantham reckons that, judging by long-term trend growth, the S&P 500 is back at fair value for the first time since 1994 (see chart). But as he points out, “when bubbles correct, they usually overcorrect, so that the market is selling well below fair value”. So although he is buying steadily, he admits he is “very probably buying too soon”. After the US stock bubble in 1929, and Japan’s bubble in 1989, those markets fell by more than 50% beyond their “fair value”. Even a 20% over-run, which is what a “reasonably conservative investor” should allow for, says Grantham, would see the S&P 500 fall to at least 800 points.
And there’s plenty of reason to be cautious. Data on the wider economy just keep getting worse – US retail sales fell 1.2% in September, for the third month in a row, and both the US and the UK are almost certainly in recession by now. Yet earnings expectations still aren’t fully reflecting this, so there’s plenty of potential for disappointment. So with markets likely to fall further for quite some time to come, we wouldn’t suggest buying a tracker fund just yet.
But those who are willing to do their homework on individual stocks might find that now is a good time to start dipping a toe in the market (see Picking shares: how to tell gems from the dross for more). Bolton says he has never seen retail or media stocks as cheap, but given the reliance of those sectors on consumers, we’d still be wary of buying.
A better bet might be to look at what Marty Whitman, the 84-year old chairman of Third Avenue Management, is buying. He tells Forbes he is only interested in “super credit-worthy” businesses, which have no need to raise more money in the markets, and reckons “this is a once-in-a-lifetime opportunity” to buy certain stocks. He particularly likes Toyota Industries (US:TYIDF), which is trading on a p/e ratio of ten and a price of around $23 a share – “basically the value of Toyota Motors” alone. Add in every other company in the Toyota business empire, and the share price should be around $40, says Whitman.