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.
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