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To Infinity and Beyond? Don’t Be Surprised If the U.S. Stock Market Cracks

In 1986 Jeremy Grantham — an investment legend and co-founder of Boston-based asset manager GMO — started to warn his firm’s 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 today’s 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, Grantham’s credibility became inversely correlated with the Nikkei. Every time the Nikkei set a new high, Grantham’s 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; it’s very taxing on one’s creativity, especially if everything you’ve said to date was “wrong.”

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 other’s number by coming up with a larger one. I’d 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? I’ll 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.

Leave a Comment    (5)

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I'm really not sure what Vitaliy is trying to say here. The old broker's saw, "The market may go up, it may go down, or it may stay right where it is"? There's always reason for "caution." There is never NOT a reason for "caution." Does "caution" mean being ready to pull out of the market entirely and buy Krugerrands? Diamonds? Freeze-dried survival foods? Come on, through thick and thin, ownership of pieces of American companies that pay a dividend out of their profits has been a winner's game. Worrying about "the market" seems like the province of day traders, casino addicts, gamblers. If you want to preserve capital and make an income out of the American economy, there is no better way than buying into good stocks and holding them through thick and thin. Of course, there is no guarantee -- there's no guarantee you won't have a stroke tonight. People looking for guarantees should take up religion.

Bottom line, I like Vitaliy's writing, but he's going to have to come up with something more specific and substantive than this circular mumble if he expects to impress me as an investor.

Jan 10 2015 at 10:22 PM EST

Jim Houghton

Its seems like nothing really changes. Just the names. bubble.... Can you say "Cloud Computing" ....

Sep 15 2014 at 11:04 AM EST


Stock market will have ups & downs so this is going to be the case now & then.

Aug 26 2014 at 5:26 AM EST

Mulham Masih

As you honestly note "None of the topics I have discussed above are new;... You are probably as tired reading as I am tired writing about these topics."

What then is the strategy? As a long term investor do a just ride out the hit knowing that I have a solid portfolio that will in time show this looming crack as a mere blip in greater scheme of things? Or do I take profits on the more expensive stocks and increase my cash holdings (forego x years of gains and dividends) in anticipation of buying opportunities who knows when?

Jul 19 2014 at 2:03 AM EST


Judging from your apparent age in your photo, you may have not seen the Oct. 23, 2000 issue of II. I have the cover framed and hanging over my desk as an effective reminder: "New Economy, Bad Math: Analysts take a deserved rap for their e-commerce valuations". Analyst in pin-striped suit sits on stool facing the corner, dunce cap on head, with equation on blackboard: "P/E = (infinity symbol)"

Jul 15 2014 at 2:15 PM EST

Gail Fletcher