Jeremy Grantham: Reinvesting when terrified
In this paper, Grantham says the the only cure for "terminal paralysis" is to have a battle plan for reinvestment and to stick to it. Grantham believes that strategically, a battle plan which involves a few planned purchases is more effective and risk averse than one which involves a single purchase or many small purchases. Grantham states that GMO activated its multi-phased battle plan in October 2008 with a large reinvestment.
The next phases of the battle plan will be contingent on further market declines. Thus, if we see market gains, GMO will be one of the first to experience an increase in the value of their investment. If the market continues to decline, GMO will be well placed to make further valued based strategic purchases at pre-defined price points, whilst recording calculated and sustainable losses.
Grantham also notes that, based on the assumption of normal P/Es being applied to normal profit margins, GMO believe that the S&P is worth 900 at fair value (30% above the current price), and that global equities are even cheaper.
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