The latest letter from Jeremy Grantham (GMO) hit yesterday, I just got through it this morning. He’s sticking with his “Seven Lean Years” thesis although he likes certain pockets of stocks here and abroad. He’s also got an interesting chart demonstrating how long it normally takes for stocks to get back on their horse after a bubble bursts….
GMO has looked at the 10 biggest bubbles of the pre-2000 era and has calculated that it typically takes 14 years to recover to the old trend. An important point here is that almost no current investors have experienced this more typical 1970’s-type market setback. When one of these old fashioned but typical declines occurs, professional investors, conditioned by our more recent ephemeral bear markets, will have a permanent built-in expectation of an imminent recovery that will not come. For the record, Exhibit 1 shows what the S&P 500 might look like from today if it followed the average flight path of the 10 burst bubbles described above. Not very pretty.
You can download the whole letter from GMO here, click below for PDF: