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David Iben: where Jeremy Grantham is wrong on value

David Iben: where Jeremy Grantham is wrong on value

Jeremy Grantham has wrongly given up on markets mean reverting and his belief that value investing will remain in the wilderness for years is too pessimistic.

That is the view of veteran fund manager David Iben, who dedicated a huge swathe of his latest market commentary to questioning recent comments by the GMO founder.

Speaking in May, Grantham said value investors faced being ‘frustrated for some considerable further time’ as profitability, interest rates and pricing as a whole remain unfavourable.

Iben – who expressed his respect for Grantham – said the conclusion about current market conditions was not convincing and showed that the investor has made a considerable change in his investment outlook.

‘Mr Grantham used to believe strongly in the concept of reversion to the mean and had previously espoused the view that the current market level of two standard deviations from the norm represents a potentially dangerous bubble,’ Iben wrote.

‘Have the "laws" that govern the universe really changed that much? Does he truly believe that this current age of increasing political and corporate corruption [sic] power, and the resultant mal-investment, no longer mean that, figuratively, we’re "on the eve of destruction"? It always has in the past.’

Iben said Grantham is essentially rejecting the idea of market cyclicality and suggesting it is moving to a more linear base, which may or may not be true.

In addition, Iben said Grantham’s fundamental argument is anchored around central banks continuing the ‘lower for longer’ remit of recent years.

‘The idea that, because the powers that be will be doing everything they can to make the current low interest rate and high profit margin world last a long time, it will be so, is questionable at best.

‘While confessing that we don’t believe the era of perceived central bank infallibility could last nearly this long, we continue to have severe doubts about its mortality.’

Rounding out his five-page assessment, Iben said valuation remains key despite current elevated levels and added that giving up on value investing in the current market would be a huge risk.

‘We’ve devoted an inordinate amount of time to this one particular over-extended trend, but these are unordinary times,’ Iben added. ‘We share Jeremy’s pain and value his thought process but have come to a different conclusion. Time will tell.’

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David B. Iben
David B. Iben
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