US publication Outstanding Investor Digest arrived on my desk yesterday. This excellent quote from GMO’s Jeremy Grantham is on the back page.
“It was psychologically painful in 1999 to give up making money on the way up and expose yourself to the career risk that comes with looking like an old fuddy duddy. Similarly, today, it is painful and risky to one’s career to part with your increasingly beloved cash – particularly since cash has been so hard to raise in this market of unprecedented illiquidity. As this crisis climaxes, formerly reasonable people will start to predict the end of the world, armed with plenty of terrifying and accurate data that will serve to reinforce the wisdom of caution. Every decline will enhance the beauty of cash until, as some of us experienced in 1974, ‘terminal paralysis’ will set in. Those who were overinvested will be catatonic and just sit and pray. Those few who look brilliant, oozing cash, will not want to easily give up their brilliance. So almost everyone is watching and waiting with their inertia beginning to set like concrete.
“Typically, those with a lot of cash will miss a very large chunk of the market recovery…. In June 1933, long before all the banks had failed or unemployment had peaked, the S&P rallied 105% in six months. Similarly, in 1974, it rallied 148% in five months in the UK! How would you have felt then with your large and much beloved cash reserves?
“Finally, be aware that the market does not turn when market participants begin to see light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before.”
GMO Article, Reinvesting When Terrified – March 4, 2009