Words from the Wise….

Invest or else

David Berman, today at 2:24 PM EDT  globeandmail.com

Jeremy Grantham, founder of Boston-based investment management firm GMO, doesn’t mince his words when he addresses the question of whether investors should throw money at the stock market when it has fallen so sharply. Yes, if you invest too much money all at once, you will probably regret it.

“On the other hand, if you invest too little after talking about handsome potential returns and the market rallies, you deserve to be shot,” he said in a note to clients.

He is, of course, largely referring to himself in that firing line – because Mr. Grantham has long been skeptical of stock market returns, given the huge runup is valuations during the heady days of the late 1990s, and again earlier this decade. However, with the S&P 500 down more than 50 per cent from its high earlier this month, he issued a letter to clients arguing that the S&P 500 was worth 900 at fair value, or about 30 per cent above its level then. After a five-day rally, the S&P 500 at 900 would be 17 per cent above its level on Monday afternoon, when it rose to 772.

No word yet on whether Mr. Grantham believes the recent rally has sticking power, but he said in his letter that there was a 50/50 chance that the S&P 500 could fall below 600. That possibility doesn’t faze him though.

“It is particularly important to have a clear definition of what it will take for you to be fully invested,” he said. “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.”

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