Advice from Grantham, Greenblatt, Whitman & others

Each week I scour the investment landscape looking for thoughts and insights from the top minds in on Wall Street.

By John Reese Oct 31, 2009 9:23AM

When it comes to investing, I firmly believe that reinventing the wheel can be a dangerous game. If you want to beat the market over the long haul, I think your best bet is to learn from those rare investors who have done just that -- that's why I created my Guru Strategy computer models, and it's why at the end of every week I examine what some top strategists have been saying about the market and the economy.

 

Over the past week, there's been a pretty significant range of opinions coming from the gurus I follow -- not a huge surprise given the uncertainty and volatility we've seen in the market lately.

 

Two top strategists who do agree on where the best values are in the market right now, however, were Jeremy Grantham of GMO and Joel Greenblatt of Gotham Capital. In his third-quarter letter, Grantham said he sees U.S. “quality stocks" -- those with high, stable return and low debt -- as now trading at “genuine outlier levels” compared to the rest of the market. “In our seven-year forecast the quality segment has a full seven-percentage-point lead over the whole S&P 500, or 9% over the balance ex-quality,” Grantham says.

 

In looking at the broader market, however, Grantham had words of caution. “Fair value on the S&P [500] is now about 860," he wrote, which puts the index as about 20% overvalued based on the Oct. 30 close. Grantham says momentum and stimulus should keep the rally going through the end of this year, but he expects a painful pullback to below fair value level in the first few months of 2010.

 

Greenblatt, meanwhile, says his quantitative approach is also keying in on higher-quality names. He told Yahoo! TechTicker that stocks with poor fundamentals got hammered last fall and in the early part of 2009, and have surged back during the rally. Higher-quality stocks, on the other hand, fell less during the plunge, and have risen less in the rebound. “A lot of those are available at attractive prices,” he said of the latter group.

 

Rob Arnott of Research Affiliates has a different take. He says deep value stocks are the place to be. “What we’re seeing is value priced as if Armageddon isn’t right next door; but it might be three or four doors away,” he told Canada’s Globe & Mail. “And the growth side is priced as if the troubles are over and it’s back to the races. That doesn’t make sense. … The investments that make sense in this environment are deep-value stocks, which are priced for a fairly tough economic slog, and inflation-linked bonds, because they’re priced to reflect fairly low inflation expectations at a time when governments around the world are setting a trillion-dollar bonfire every few months.”

 

Then there's Gary Shilling, the economist, money manager, and Forbes columnist who has had a pretty good track record of identifying bubbles. He tells Steve Forbes that he thinks stocks are now in a bit of a bubble. “There was a realization earlier this year that the financial structure was not going to disappear into the earth, and that was certainly cause for a revival in stocks,” he said. “But, to me, they’ve way outrun reality.” He likes defensive plays like consumer staples, utilities, and healthcare, and he's still high on Treasuries.

 

Another bear: First Pacific Advisors' Bob Rodriguez. He tells Kiplinger's that he recommends short-maturity, high-quality debt on the bond side. He also says that if the U.S. government keeps increasing its balance sheet through huge deficits, “you should probably move at least 20% to 40% of your assets out of the U.S.”

 

Others are sticking with a long-term stock approach. Marty Whitman of Third Avenue Management told Kiplinger's, for example, that investors should “find extremely well-financed companies that do not rely on continuous access to the bond or stock markets for refinancing, that are run by competent management teams and that have favorable prospects for growth.” Then, buy those issues when they’re trading at a discount. “All other systems of investing are concerned with predicting stocks’ near-term price movements,” he says.

 

Similarly, GAMCO's Mario Gabelli, another bottom-up value investor, told CNBC that the best way to make money in a relatively flat market is "good ol' stock picking".  He also says that the so-called "new normal" won't be all that new; it will simply be a return to the way things were before the financial sector got out of control.

 

Finally, MarketWatch columnist and newsletter tracker Mark Hulbert offered some http://www.marketwatch.com/story/no-more-bullish-now-than-2000-points-ago-2009-10-30. As of Thursday, the shortest-term market-timers tracked by his Hulbert Financial Digest, on average, recommended that investors be 19.4% in stocks. The last time the figure was that low: early July, when the Dow Jones Industrial Average was almost 2,000 points lower than recent levels. "The bull market since July has had no net impact on the sentiment among market timers," Hulbert says. "Call it a stealth bull market, if you will.” Advisers have upped their equity stakes only "begrudgingly", he says, and have been quick to bail on stocks at the first sign of trouble. That big Wall of Worry "suggests that the sentiment winds continue to be blowing in the direction of higher prices.”

 

John Reese is founder and CEO of Validea.com, a premium investment research site, and Validea Capital Management, a separate account advisory firm. He is author of the new investing book, "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies".

 

 

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