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.