On this episode of The Long View, I talked with Jeremy Grantham, a longtime investing strategist and the co-founder of Grantham, Mayo, Van Otterloo & Company, or GMO. We discussed bubbles, AI hype, environmental issues, and where investors can find better values.
Here are some excerpts from my conversation with Grantham, the co-author of The Making of a Permabear: The Perils of Long-term Investing in a Short-term World.
Balancing Business Risk and Investment Integrity
Amy Arnott: In the US, GMO has famously stuck to its value discipline during market bubbles, even if that caused you to lose clients. I’m wondering, how did you manage that tension between business risk or career risk and investment integrity?
Jeremy Grantham: We didn’t really manage it. We were, I suppose you could say, idealistic or naive, whatever. We thought at the time it was the right thing to do. By the end of all this, I realized that if you’re a big firm with stockholders and all that good stuff, you can’t fight a bull market. Keynes was right. He nailed it. … The stocks are going up—you recommend them. And everyone’s lining up to tell you to buy the craziest IPO in the history of man. In 50 years, they’ll be telling and writing stories about SpaceX, and they’ll be quoting you paragraphs from the prospectus, and you will be laughing at it.
‘A Chronic Lack of Controls’ on AI
Arnott: It’s certainly a very optimistic document about market potential.
Grantham: Well, it’s much more than that. I mean, 1.7 trillion for a company that’s rolling in red ink when 90% of the projection are on the AI of their currently third-rate AI offering who’s getting kicked around the block by Anthropic and OpenAI and so on. Just amazing. And the scale of it is amazing. And the fact that JPMorgan and others are all lining up to recommend it strongly to their clients. And of course, there’ll be a huge excess of buyers over sellers by design because, for one thing, it’s Nasdaq has cheated and changed the laws of the land so that they can squeeze it into the Nasdaq index despite the fact it has no earnings, etc., etc., etc. And what that means is there’ll be a lot of people who have to buy it for any index that is Nasdaq-y. So there’ll be much more demand than there are sellers.
So supply and demand being what it is, it’s hard to imagine the price won’t go up, and perhaps it will go up a lot. And in the end, the reality will come out, and this will turn out to be, of course, one of the landmark historical events that I so value in history looking back. It will be amazing, by the way, if it doesn’t collapse, because it will need such massive developments on AI that our entire lives are totally different.
So if its price is justified, we live in a strange world, and we’ll be lucky not to be bossed around by our automaton friends. And if it’s much more likely to have a crash, both ways it will be historically notable, and I would bet at least 90% on the second, but the first would be rather horrific for them to justify their price, and with the almost chronic lack of controls.
It’s like producing drugs and not having testing programs for the drugs. Just get them out there in the market as fast as you can. There are no equivalent restrictions on AI, much more dangerous than any drug could be, and drugs can be pretty damn dangerous, but this one, this one could change our lives in the most unpleasant ways. And you’ve got very rich, very smart people apparently saying things about productivity gains that I think don’t understand the laws of physics. Everything hinges on energy. Everything is made with raw materials. Every living creature has to eat food. These are the things that count. If you want to survive in a cold temperature, you need to keep warm, and you need clothes.
Arnott: Right. You can’t create something out of nothing.
Grantham: You can have all the brain cells in the world, but you can’t create something out of nothing. I like that. And here we are promising—I mean, some people are saying it’ll be 10%, 20% a year productivity—I mean, they have no idea what they’re talking about.
Most of the space travel and stuff, which is in the prospectus, is considered by most serious physicists and so on to be utterly inconceivable.
How ‘Propaganda’ Can Drive Up Price
Arnott: How do you recognize when something really is a good idea or a big idea?
Grantham: I only recognize that it’s much cheaper, and if I buy and hold it forever, and if it’s cheaper, I will make more money, and that happens to be a mathematical fact. In the short term, however, the valueless company like a meme stock, can outperform and go up 20 times. It doesn’t change the long-term value, and eventually it will go back down again.
There is a rare exception to that. Mr. Musk is very good at this, and that is, you talk up the price of the stock so that it’s 5 or 6 times fair value on a really decent model, and then you sell lots of stock, and you’re so good at propaganda that instead of the price falling because of the dilution, it doesn’t, and very quickly it’s multiples of fair value once again, and then you sell some more and you reinvest the money in serious giant factories, mega factories, giga factories, and you turn persuasiveness and confidence into real value.
That has always been theoretically possible. Very, very few people have carried it off for more than a little time, and Musk has been probably the best exponent of that in history so far.
AI: ‘I Wouldn’t Wish It on Our Species’
Arnott: So even if the price increases are being driven by the greater fool theory, he was still able to harvest those gains and reinvest them into something tangible.
Grantham: And turn the greater fool theory into real life. You could argue in his special case that it wasn’t even a greater fool theory, and one or two people so credited him with this skill that they invested correctly. Of course, there are many people who, in the short term, talk the same game, and they get many people investing in them, and those many people dramatically underperform, and you don’t hear too much from them. So the cohort that invested in Musk were proven right. The hundred cohorts that invested in the other hundred companies were wrong, and as they say in the trade, better to be lucky than good. And I’m not saying that a few of them didn’t do it because they were simply smarter than the rest of us. I’m pretty sure they did, and good luck to them. Well done. But mostly it’s picking that one out of a hundred where the BS is actually going to be turned into solid money by a well-programmed continuous effort.
That’s so unlikely, and yet it happened. Now, whether they can pull it off with $1.7 trillion worth of hype about AI—put it this way: If AI is actually going to be so good that the 1.7 trillion is cheap, and the AI will be so powerful that our lives will be clearly at very severe risk, I wouldn’t wish it on our species at all. So we should wish that it’s hype, because if it’s not, it’s a lot worse.
Valentina Djeljosevic contributed to this article.
