Other | March 10, 2009

Reinvesting When Terrified

Executive Summary

It was psychologically painful in 1999 to give up making money on the way up and to expose yourself to the career risk that comes with looking like an old fuddy duddy. Similarly today, it is both painful and career risky to part with your increasingly beloved cash, particularly since cash has been so hard to raise in this market of unprecedented illiquidity. Every decline will enhance the beauty of cash until, as some of us experienced in 1974, ‘terminal paralysis’ sets in.

There is only one cure for terminal paralysis: you absolutely must have a battle plan for reinvestment and stick to it. I recommend a few large steps, not many small ones. A single giant step at the low would be nice, but without holding a signed contract with the devil, several big moves would be safer. It is particularly important to have a clear definition of what it will take for you to be fully invested. Without a similar program, be prepared for your committee’s enthusiasm to invest (and your own for that matter) to fall with the market. You must get them to agree now – quickly before rigor mortis sets in. Remember that you will never catch the low. Sensible value-based investors will always sell too early in bubbles and buy too early in busts. But in return, you may make some important extra money on the roundtrip as well as lowering the average risk exposure.

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Disclaimer: The views expressed are the views of Jeremy Grantham through the period ending March 4, 2009, and are subject to change at any time based on market and other conditions. This is not an offer or solicitation for the purchase or sale of any security and should not be construed as such. Any forward looking statements are based on the reasonable beliefs of GMO and are not a guarantee of future performance. Nothing in this article should be considered investment advice.
Copyright © 2009 by GMO LLC. All rights reserved.