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Jeremy Grantham's Investment Lessons Learned From "Mistakes Made Over 47 Years" - Chapter 1

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From GMO's Jeremy Grantham

Investment Lessons Learned: Mistakes Made Over 47 Years

Chapter 1 (the first of several future chapters)

When I was a teenager, my parents had their friends over on most Sundays for a drink. (Actually, it was a 1950’s version of “a few drinks.”) During these sessions I was impressed by the confident expressions of current and future success laid out by my stepfather’s closest friend. His firm was a manufacturer of scaffolding, a  patented easily-assembled variety, for which he was the main international salesman. After two or three years I could stand it no longer and at 16, because my parents did not invest in the market and for lack of a better idea, I arrived at a bank branch in a south London suburb with the bank book from my “home safe account,” which was designed for children’s savings and which I had had for as long as I could remember. Asking to see the branch manager, I surprised and amused him by asking for his help in investing everything in my account – £16. I remember the investment well: Acrow A shares. It was his first experience with investing for a home safe account but he could see no problem and without parental confirmation or any fuss at all did the trade. And so my first commission was paid out. And, by the way, £16 was a lot. I had been extremely frugal. (The exchange rate was 4:1 and $64 of buying power in 1954 translates to about $560 today.)

So far, so good. Years came and went as they do and presently I was 26 and unexpectedly heading to business school in America. Equally unexpectedly and very generously I had been kept on the payroll of my employer, Royal Dutch Shell, but at £1,200 a year this was only going to cover one-quarter of my two-year expenses. As a result, everything I owned – as in every last thing – was cashed in. By this time my shares had blossomed to about £100 of value and my mother was by now also an investor. Encouraged by the unabated enthusiasm from our neighbor (who, after all, we had argued must surely know the innermost secrets of his firm, particularly because we knew for a fact that he had most of his wealth tied up in the company’s shares), and no doubt reinforced by past stock performance, my mother made me a proposition: to avoid paying the notorious commissions, we would transfer my shares to her account and she would pay me that Wednesday’s closing price. So, off I went to the U.S. with enough to buy my ticket on a VC10, a faster crossing than you can get today by the way, but brutally expensive for a one-way trip. (My parents had bravely allowed me to take out a mortgage on their house to draw down as I needed to balance the books.)

The following year, with little preamble “our” company imploded to zero. My mother took a few hundred pounds’ hit in her only (and last) stock holding, and our friend, right on the cusp of retirement, lost the great majority of his formerly comfortable nest egg. Almost until the last day he had known nothing about his impending doom, about big bets made and reckless debts assumed to make the corporate great leap forward. His own sales efforts in South America had continued promisingly into the last few months.

Lessons Learned:

  1. Inside advice, legal in those days, from friends in the company is a particularly dangerous basis for decisions; you know little how limited their knowledge really is and you are overexposed to sustained enthusiasm;
  2. Always diversify, particularly for your pension fund;
  3. Fraud, near-fraud, or colossal incompetence can always strike;
  4. Don’t buy stocks yourself if you’re an amateur: invest with a relatively rare expert or in a low-cost index;
  5. Investing when young will start your brain turning on things financial;
  6. Painful errors teach you more than success does;
  7. Luck helps; and finally,
  8. Have a convenient mother to be the fall guy.
 


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Fri, 02/07/2014 - 19:03 | Link to Comment wisefool
wisefool's picture

9. Learn how to train the congresscritters to write tax law. Dealing with operatives requires an IQ arbitrage around 70.

Fri, 02/07/2014 - 19:13 | Link to Comment zerozulu
zerozulu's picture

I wonder what they have learned in 2000 years?

Fri, 02/07/2014 - 19:18 | Link to Comment Leonardo Fibonacci2
Leonardo Fibonacci2's picture

I don't get mad, i get stabby

Fri, 02/07/2014 - 20:09 | Link to Comment AlaricBalth
AlaricBalth's picture

10. My father said, "Always...," no wait, it was, "Never..." hmm what was it he said? Oh yeah: "Always." Hold on. I meant to say, "never, ever fight the Fed." Sage advice I thought. Until its not.

(Apologies to Steve Martin)

Fri, 02/07/2014 - 20:29 | Link to Comment Kayman
Kayman's picture

Never fight the Fed always worked when the U.S. was the world's largest creditor nation and also the world's industrial powerhouse.

Since FRN's are a claim on U.S. based or U.S. priced assets and U.S. made assets continue to decline, it all comes down to what the rest of the world wants to price it's transactions in.

Fri, 02/07/2014 - 21:58 | Link to Comment cifo
cifo's picture

"Don’t buy stocks yourself if you’re an amateur"

I would rather advice "Become your own expert". I guess Grantham was an amateur too 47 years ago.

Fri, 02/07/2014 - 19:27 | Link to Comment disabledvet
disabledvet's picture

actually that is now a proven "to be" colossal blunder.

this is a perfect list...to which i would add "stick to your knitting."
Anyone who ventures outside their area of expertise...what others are paid to do and purpose for payment in the first place (specialization)....and in fact do (on a regular basis?)...are always the "target."

if something is seen by all..."it is obvious."
everything else...is just a rumor.
http://www.youtube.com/watch?v=XuOyBc3obqg

http://www.youtube.com/watch?v=YEi7GPkxfsE

Fri, 02/07/2014 - 19:32 | Link to Comment Black Forest
Black Forest's picture

9. Ignore advices.

Fri, 02/07/2014 - 19:06 | Link to Comment fonestar
fonestar's picture

His biggest mistake is not buying Bitcoin.  Learn from other's tragedies.

Fri, 02/07/2014 - 19:08 | Link to Comment Sudden Debt
Sudden Debt's picture

which version?

Fri, 02/07/2014 - 19:51 | Link to Comment fonestar
fonestar's picture

You guys sound like fonestar's relatives after he pushed them from a well diversified portfolio into Bitcoin at almost $1100.

Fri, 02/07/2014 - 19:09 | Link to Comment Boris Alatovkrap
Boris Alatovkrap's picture

Mr. Fonester,

47 year from now, you are maybe write memoir of big mistake.

Sincerely,

Boris

Fri, 02/07/2014 - 19:28 | Link to Comment disabledvet
disabledvet's picture

"steal from Government" is plan indeed.

Fri, 02/07/2014 - 19:58 | Link to Comment fonestar
Fri, 02/07/2014 - 20:33 | Link to Comment malek
malek's picture

unless the retirement age gets pushed out

Fri, 02/07/2014 - 19:08 | Link to Comment sixsigma cygnus...
Fri, 02/07/2014 - 19:23 | Link to Comment zaphod
zaphod's picture

That's a problem with Coinbase, not bitcoin. 

These people did not have their bitcoin wallets hacked, they trusted a 3rd party and that 3rd party screwed up.

The advantage of bitcoin is you do not have to trust any 3rd parties at all. No one should ever leave coins on coinbase or another other online service since it is 100% free to move any bitcoins you control to your own wallet. 

Over time regulations will create better security around online bitcoin services, for now it is the wild west. But either way this is a problem with 3rd parties, not bitcoin.

Fri, 02/07/2014 - 19:41 | Link to Comment Boris Alatovkrap
Boris Alatovkrap's picture

You are funny contortion.

"Problem is not BitCoin"

"Problem is third party"

"Bitcoin advantageous is not trust 3rd Party"

"Bitcoin is need more regulation"

Is sound like you are want government to take over BitCoin and make it BitCoin "safe". Is like say problem with Federal Reserve Note is not paper is print on, just bank that control issuance and manipulate and dilute value. Okay, Boris is agree.

Sat, 02/08/2014 - 03:20 | Link to Comment PN7
PN7's picture

I thank you for providing this link.  I have a Coinbase account with almost exactly the number of bitcoins in it as Jeff had stolen from his Coinbase account.  My account seems quite secure.  If I try to move bitcoins out of my account I need to obtain an authorization from Coinbase first.  I do this by clicking a button on my transfer request at their website which triggers a phone call to my home phone.  The phone call gives me a 7-digit numerical code to enter in the "auth" box on my transfer request at the Coinbase website.

This seems very secure to me; but I appreciate what you made avaliable thru your link.  I will transfer a larger portion of my bitcoins to my "paper wallet."  Thanks much. 

Fri, 02/07/2014 - 19:27 | Link to Comment Dr Benway
Dr Benway's picture

Fluff article of banalities that could have been on any MSM.

Fri, 02/07/2014 - 19:32 | Link to Comment Frank -THE COIN -
Frank -THE COIN -'s picture

Great Lessons Learned from a Market Wizard.

Fri, 02/07/2014 - 19:33 | Link to Comment Rainman
Rainman's picture

A Cali King size mattress and box spring will always come in handy

Fri, 02/07/2014 - 21:12 | Link to Comment The Wisp
The Wisp's picture

I want to See the Mother's version of that Same Story...

Fri, 02/07/2014 - 21:16 | Link to Comment Offthebeach
Offthebeach's picture

Where's the drink heavily and often lesson?

Sat, 02/08/2014 - 12:57 | Link to Comment AdvancingTime
AdvancingTime's picture

Predicting the future is an impossible task, a fools errand, full of pitfalls. Still we listen and soak in all that is said, we even spend a tremendous amount of money to gain an edge in knowing what maybe just around the corner. If you step back ten years in your mind, I suspect that things have not unfolded as you might have predicted.

When you see how the world has developed, the twist and turns are most unpredictable. Nowhere is this more apparent then in the economy, whether it is in the areas of interest rates and inflation or the rise and fall of companies. More on the subject of predicting future events in the post below,

http://brucewilds.blogspot.com/2013/06/predicting-future-and-hindsight-m...

Do NOT follow this link or you will be banned from the site!