Jeremy Grantham an investment legend and co-founder
of Boston-based asset manager GMO started to warn his
firms clients about, and even created an investment
product to protect them from what he believed would be, the
eventual bursting of the Japanese stock bubble. We all know how
that story ended: In 1990 the Japanese market crashed, stocks
declined more than 70 percent from their peak, and the Japanese
economy slipped into a 25-year coma.
However, before all these bad things happened, from 1986 to
1990 the Nikkei more than doubled.
Grantham was right, but it took four years for the risk
that he identified to play out.
From todays perch, four years in the 80s are
just four years in the 80s, but I am sure that to
Grantham they seemed like dog years. In the eyes of his clients
and the market, Granthams credibility became inversely
correlated with the Nikkei. Every time the Nikkei set a new
high, Granthams reputation set a new low.
I used to think that bull markets end when every bear is
mugged, skinned and reincarnated into a bull. Now I realize
that is only partially true. A lot of bears stop growling
because they get exhausted or simply bored. Repeating the same
warnings adding new analogies and superlatives is
exhausting; its very taxing on ones creativity,
especially if everything youve said to date was
Once things temporarily disconnect from gravity and elevate
into the domain of insanity, adjectives start to lose their
meaning. Trying to quantify expensive once stocks
become expensive resembles a game we played as kids. We had
just discovered arithmetic and were trying to beat each
others number by coming up with a larger one. Id
say a thousand, a friend would say a
billion, and it would go on like that for a while until
one of the smarter kids would say infinity. That
should have been the end you cannot have a number bigger
than infinity but invariably the game continued:
Infinity times infinity, infinity times
infinity plus one and so on. The person with the loudest
voice or the most persistence won.
Now take yourself back to the mid-80s. When Japanese
stocks were trading at 25 times earnings, they were very
expensive. A year or two later, they were at 35 times earnings
and you needed a new superlative expensive times
infinity? Ill let you, dear reader, come up with
adjectives for when Japanese stocks got to 40, 45, 50, finally
peaking at 56 times earnings in 1990.