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Grantham: heartbreak, patience and capitalism's Darwinian trials

by Sarah Miloudi on Feb 27, 2012 at 15:00

Grantham: heartbreak, patience and capitalism's Darwinian trials

Some of capitalism's greatest successes in recent decades have helped create a belief that all investments can hit high hurdle rates, GMO's Jeremy Grantham has said.

Capitalism will continue to evolve through a series of Darwinian 'trials and errors', the strategist explained, but for the time being the corporate world has tuned itself to expect high growth at almost any cost.

'Circumstances such as the hydrocarbon revolution and the ensuring population explosion have allowed for both high growth and high profit margins to sustain the growth,' Grantham said. 

'Sustained high margins have in turn trained capitalists  - or corporate executives, if you prefer - to set high hurdles for all investments,' Grantham bemoaned, arguing that over the years this slowly chips away at the value of money, so that events in the distant future are effectively ignored.

Investors' task is survival

Writing in his quarterly update, Grantham said markets have a habit of being 'gloriously inefficient', with all investment frenzies passing. However, this is not before investors' patience has thoroughly been tested, and breaking investors hearts before finally returning to normal.

Grantham said: 'The market is gloriously inefficient and wanders far from fair price, but eventually, after breaking your heart and your patience (and for professionals, those of your clients too), it will go back to fair value.'

'Your task is to survive until that happens,' highlighting his belief in history, diversification, resisting the crowd and natural optimism as the key to navigating choppy markets.

Grantham is sticking to his belief profit margins and price earnings ratios will move back to the long-term average in seven years. These predictions have so far been accurate, despite markets testing his patience.

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