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« Michael Lewis: Moneyball - Basketball Style (Why investors should heed the lessons of probability) | Main | Building a Better Beta: Not all Beta is created equal »

April 3, 2009

Grantham's Great Investor Attributes

After reading Jeremy Grantham of GMO’s most recent letters, I see that there are several attributes of Mr. Grantham that I admire and think are common amongst other great investors:

1.     Willingness to say “I don’t know.”  Jeremy Grantham has great insight on a vast amount of financial market topics, but he is quick to say, “I don’t know”, when the certainty of his conclusions are low.  Great investors all readily admit their own limitations.  Certainly, they know a lot, but they are very aware of what they do not know as well.  (Quote from Grantham letter - "As for commodities, who knows?  There were a few months where they looked like a high-confidence short, but now they are half-price or less, and are much lower confidence bets.  In currencies, we know even less.  It is easy to find currencies to dislike, and hard to find ones to like.  There are no high-confidence bets, in our opinion.")

2.     Understanding that some answers are unknowable.  This is different than just saying "I don't know" because it involves issues where it simply is not possible to ever gain enough confidence in your answer that you never waste your time trying.  Grantham is quick to point out that some answers are unknowable (ie. market direction in the short-term).  Investors so often get consumed by trying to predict the unpredictable or discern trends from things that have no definable pattern, that they have no spare capacity to analyze the variables with the highest coefficient of proving success (cash flow, capitalization, sustainability).  Admitting the things around you that are unknowable will not only make you a better investor, but give you immense peace of mind.

3.     Choose information that matters.  Grantham seems well built to take in vast amounts of information and quickly discern the level of importance of each by allowing only relevant information into his scope and excluding low importance information distractions.  Investors are certainly not short on information they can consume so having the correct filter is more important than ever.  The best way to improve upon this issue is to have a framework of potential upside if your thesis is correct, potential downside if your thesis is incorrect, and a probability of each coming true.  As new information comes in, do an initial assessment to determine if it will have a meaningful impact on your framework.  If it does not, move on.

4.     Sitting on the sidelines when there are no good ideas and taking large bets only when the risk-reward is compelling.  (“I was asked what the secret was to our rapid growth of assets.  I replied, we are simply willing to lose more business than the other guys.  By this I meant that we are extremely attached to the idea that we make very big bets on those relatively rare occasions when we have very high confidence.  I believe that career and business risk – the fear of losing clients – dominate our business, and it is so hard to sidestep that the big bets will always be available and will always be career threatening.  And that is the turf we have staked out:  make the “near certain” bets as large as we can, sweat out the timing problems, and pray for patient clients.” – Jeremy Grantham, GMO)

Check out our "Good Investor Mentality" quiz.

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