Jeremy Grantham, 87, studied economics at the University of Sheffield and attained an MBA at Harvard Business School before entering the investment field in the 1960s. He cofounded GMO, a Boston-based global investment management firm with more than $78 billion under management, in 1977. Known as a contrarian investor with a deep value streak, Grantham is a member of GMO’s asset allocation team and serves as the firm’s long-term investment strategist. His book, The Making of a Permabear: The Perils of Long-term Investing in a Short-term World, was published in January. Here, Kiplinger speaks with Grantham about short-term patience, long-term opportunities, bubbles and more.
Kiplinger: Why do you call yourself a permabear, at least on the cover of your new book?
Grantham: I voted for quote marks around the phrase, but I got outvoted.
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Talk a little bit about a recurring theme in the book, which is reversion to the mean, or the idea that extreme asset values will eventually return to their long-term average levels. It’s a bedrock postulate of value investing, but you also called it “the heartbreaking principle that good times always revert back to more boring, more ordinary times.”
As a historian, you think the past counts for something. It represents how humans behave. If you see a historical pattern recurring, you tend to believe it. It’s not a law but a useful guiding principle. That’s all reversion to the mean is. If you see a historical pattern and it makes sense, you adopt it as an approximate forecasting technique. At least I do.
You’ve been prescient about past stock market bubbles, including Japan in the late ’80s and the dot-com debacle in the 2000s. Have artificial intelligence–related stocks been in a bubble, and is it bursting now?
I expect that AI is a fully fledged, spectacular bubble, comparable only to the railroads and the internet. AI is very obviously an important idea — it’s the obviousness that counts. If everyone can see that it’s an important idea, then everybody will put their money into it, and in the short term it will be an overinvestment situation.
(Image credit: PHOTOS COURTESY OF GROVE ATLANTIC)
The railroads changed the world for everybody, but it didn’t mean that there was not a dreadful bust, because too much money had been thrown at it too quickly. The same occurred with the internet. Today, the AI bubble isn’t more than 5% deflated; it’s more or less at its peak.
What will cause prices to go down? Who knows? (One never does.) But it doesn’t take much disappointment to break it. The timing of these things is always completely hairy, completely difficult. I would guess anytime from next Wednesday to a couple of years from now. It’s hard to get it right.
How patient must value investors sometimes be?
Patience is a problem. John Maynard Keynes, just about my only hero as an economist, is famously attributed with the quote, “The market can remain irrational longer than you can remain solvent.” Even if he didn’t say it, he should have. It’s a terrific quote.
The uncertainty that surrounds a regression to the mean, particularly about bubbles in the stock market that are bursting, can last two, three, four years. But an investor’s patience in a bull market is very short. Clients start firing you at about a year and a half; by two years, they’re shooting you in flocks. Of course, in the long run, two years is not very long, and yet it could ruin an investment company.
Which is why you say short-term thinking is ingrained on Wall Street.
You can’t expect the Goldman Sachses and the JPMorgans of the world to fight a bull market and tell you to get out. It’s not a viable strategy. It doesn’t make business sense. It’s too big a risk. And so they never do it.
And that’s why individual investors — and institutions, for that matter — have never been told clearly to get out of the U.S. market at any level. They weren’t told in 1929, or in 1972, or in the tech bubble of 2000, or more recently. On the other hand, one has to remind oneself that it isn’t what you don’t own that determines your success. In the end, it’s what you do own.
Where do you see long-term investment opportunities for investors now?
In the beginning of last year, I said the good news was there was no sign that the rest of the world’s equity markets, outside the U.S., were expensive. They were perfectly reasonable — oddly reasonable, you might say, given that the U.S. even a year ago was badly overpriced by historical standards. And the rest of the world has hugely outperformed the S&P 500 over the past 12 months.
In GMO’s accounts and in the indexes, emerging markets, Japan and international value stocks are all up in the 45% to 50% range. Yes, the S&P 500 is up a surprising 17%, but that’s not nearly 50%. The move toward non-U.S. equities has made a handsome start, but it’s quite probably got years to run.
Be patient, and you will handsomely outperform the market — period.
What are the key identifiers of a value-priced stock or stock sector?
The classic one is replacement cost — what it would take to reconstitute a company. In lieu of those good numbers, you can make do with a longer-term price-earnings ratio, like the Shiller P/E that takes 10 years of earnings data into account, so you don’t overweight one good year.
On that basis, the U.S. equity market is about as overpriced as it’s ever been. So we’re going to get a much lower return, or we’re going to have a market crunch, and then we’ll get a normal return. The risk levels now are much higher than normal.
How can individual investors develop a strong contrarian mindset and avoid the curse of short-termism that seems embedded in human nature?
They’re actually in a wonderful position, because they don’t have the career risk that people at a big company have, who have to keep dancing as long as they think the music is playing. An individual has control over his own money. If he has the confidence to look at the data, it’s not difficult to tell if the market is overpriced — or more to the point, when alternatives are better. Look at the ebb and flow. If an asset delivers a gigantic outperformance, then move your money to cheaper ones.
Be patient, and you will handsomely outperform the market — period. Everyone believes that big institutions can’t make big mistakes, but the opposite is true. At major turning points, the big institutions almost always get it wrong. That’s not a bug, but a feature of our system.
You’ve sounded alarms about environmental risks to our planet, among other things. What worries you most, and how should investors adjust their portfolios if they agree with you?
What worries me most… that’s a difficult question. There are so many contenders. I worry about AI — who doesn’t? — and whether it may eat our lunch or, in the end, destroy us all. I worry about the possibility of war getting out of hand. I worry about climate change, and this weird American tendency to deny it, or ignore it. And I particularly worry about toxic chemicals that are affecting fertility rates, and baby production crashing around the world.
As for your portfolio, like most things in investing, it can be counterintuitive. Curiously, despite the idea taking a hit from the current American administration, GMO’s Climate Change fund (GCCLX) was up 40% in 2025, give or take. Look around. Such funds do exist. They won’t automatically outperform, but in the long run, you’ll be on the right side of history, I would say.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
