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- Jeremy Grantham’s GMO is warning investors of making common mistakes amid the current stock market volatility.
- In GMO’s quarterly letter, GMO’s Ben Inker highlighted the four common mistakes investors must avoid.
- “Investing does seem to be an area where there are lessons that usually cannot be taught, only painfully learned on one’s own,” Inker said.
As stock market volatility surges amid an anticipated cycle of interest rate hikes and rising geopolitical tension between Russia and Ukraine, investors would do well to slow down and think before committing some common mistakes.
That’s according to Jeremy Grantham’s asset management firm GMO, which highlighted four mistakes investors should avoid at all costs in its quarterly letter on Thursday.
“None of us are immune to making investment mistakes, and investing does seem to be an area where there are lessons that usually cannot be taught, only painfully learned on one’s own,” GMO’s Ben Inker said.
These are the four common mistakes investors should attempt to avoid as the stock market sees increased volatility and uncertainty from various macro factors.
1. Piling into growth and the US stocks and out of Chinese and Emerging equities.”
AKA: “Riding your winners and losing faith in your losers.”
“To many investors, having an overweight to US equities seems not merely harmless but actually risk-reducing, given that the US has performed better in most downturns over the last 15 years. It is natural to feel that any market that has recently done well is less risky and those that have done poorly are riskier, but this turns out not to be the case,” Inker said.
2. “Piling into private equity and venture capital.”
AKA: “Trying to copy the portfolios of recently successful institutions.”
“Piling into the assets that made ‘the smart money’ the most presents two kinds of problems. First, the institutions that did best after the fact are generally those that had the largest allocations to the markets that happened to do best. But beyond that problem there is a deeper one. It is one thing to see that MIT made 55% in fiscal 2021 and had 43% of its endowment in private equity. It is another to have the resources and access to be able to build a portfolio equivalent to MIT’s,” Inker said.
3. “Assuming that assets that made it through the pandemic well carry low fundamental risk.”
AKA: “Excessive faith in the results of the last war.”
“The basic issue is a broader one than what happened in a particular market downturn. There is no single definition of ‘risk’ that one can rely on to tell you how an asset will do in a bear market. An asset might be reasonably resilient to losses driven by economic weakness but very vulnerable to losses from a liquidity shock. My team tends to look at risk on three basic axes – depression risk, inflation risk, and liquidity risk – and there are no assets proof against them all,” Inker said.
4. “Using an unrealistically high expected return for your portfolio.”
AKA: Failing to understand the implications of the historical sources of asset returns.”
“This is a warning I have been giving for years now, and it’s one of those situations where the fact that I have been wrong in the shorter term makes me all the more likely to be correct in the long term. The fact that valuations have continued to rise and returns therefore continued to be strong does not change the fact that all else equal, rising valuations necessarily imply falling future expected returns,” Inker said.
“No matter how fast markets are moving, taking a little time before pulling the trigger on a decision to try to ensure it is a well-reasoned one is unlikely to be a mistake,” Inker concluded.
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