If you are a fan of Jeremy Grantham's quarterly letter to his investors, you might be interested to know that he is now urging investors to shift cash into the stock markets.
Grantham dubbed a "perma-bear" for having a negative view of the stock market for 10 years, and correctly predicting the end of the dot-com era and foreseeing in 2007 that the credit bubble would lead to collapse of banks and hedge funds. He reversed his decade long bearish stance on stocks and expects it to return 10-13% in the next 7 years. Grantham recommended investing in a few large steps instead of all at once as it would be impossible to catch the bottom of the market. His fair value estimate of the S&P500 index is 900.
My take is that, the S&P500 currently projects 2009 earnings at $48.10. Given the long term (last 20 years) average earnings of 19.4 it traded at, the current fair value can be estimated at 933. However, in the last 20 years, we've been in a bubble for more than half the time, hence maybe an average earning of 15 would be more conservative, and that would estimate fair value of S&p500 index at 721.
As I am writing this, the S&P500 has already risen more than 6% today to 719, but I would still support Jeremy Grantham's urge to start shifting cash to stock in stages and this is definitely a attractive level on valuation grounds to put your money into the stock markets.
Eric Tan, London
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