The Little Book of Bull's Eye Investing: Finding Value, Generating Absolute Returns, and Controlling Risk in Turbulent Markets

Chapter Four

The Trend Is Your Friend (Until It Isn’t)

A LITTLE NOTE AS we get into this chapter. The research I write about was all done 8 to 10 years ago. All of it accurately predicted what has since transpired. I want you to realize it didn’t come from people trying to explain the past; they were looking into the future. And it is just as relevant today!

The Historic Trend of . . . the Trend

Jeremy Grantham is a guru of the investment industry. His firm, Grantham, Mayo, Van Otterloo (GMO) Advisors, manages over $130 billion.

Grantham is a deep-value investor. In 1998 and 1999, he took his clients out of stocks because—by his calculations—prices in traditional stock portfolios had simply gotten too far out of line with values.

Grantham believes that no matter what happens to prices in an investment class, eventually they come home to a normal standard of value. When assets are well above their long-term trend, he avoids them; and when they are well below trend, he buys them. While it can take years for prices to revert to the trend, his style works for anyone with the patience that comes with knowing that time is on your side. Grantham has been successful at simply investing for the long term, using history as his guide.

(Notice that this is more discriminating than buying stocks and index funds with no concern for current values and holding them for the “long run.” It entails buying specific companies at competitive valuations.)

As a student of history, I like his approach ...