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Grantham Sees Huge Opportunity in "Anti-Risk"

Will a financial bubble crush small caps and hedge funds?

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Jeremy Grantham says he's spotted the third great investing opportunity of his career. The first was small caps in the 1970s. The second was real estate, Treasury Inflation-Protected Securities, and value stocks during the tech bubble in 2000. Before you get too excited, I should make clear that the main opportunity today, in Grantham's view, is getting out of the way and watching the markets plummet in what he calls a slow-motion train wreck. Grantham made this call in a report published July 25--a day before the Dow got 300 points sliced off the top (talk about instant gratification!).

Grantham's firm, GMO, runs mostly institutional mutual funds but also runs half of  Vanguard U.S. Value (VUVLX) and all of  Evergreen Asset Allocation (EAAFX). Grantham has always had a bearish tilt, so I typically take his warnings with a grain of salt. Still, he has been very much on the money with his warnings about the S&P 500 in 2000 and recommendations of foreign small caps, emerging markets, and timber.

In Grantham's view, we are in a financial-debt-soaked bubble that he's labeled the Blackstone Peak. Real estate and bonds are wobbly, and equities may weaken in October 2008. Grantham is a big believer in election cycles, which essentially means that the government floods the economy with money to get itself re-elected and then the market has a big hangover the following year when the bill comes due.

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Russel Kinnel does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.