Jeremy Grantham

Jeremy Grantham built GMO into a major asset management firm by maintaining conviction in long-term valuation frameworks even when they diverged sharply from market sentiment, positioning to profit from mean reversion.

The early years and GMO

Grantham grew up in England and studied mathematics at Oxford, which gave him a quantitative foundation unusual among investors of his era. He emigrated to the United States and worked in investment management before co-founding GMO (Grantham, Mayo, and Van Otterloo) in 1983.

GMO’s early approach was asset allocation based on rigorous valuation analysis. Rather than trying to pick individual stocks, GMO would analyze valuations across asset classes — US equities, international equities, bonds, commodities — and recommend allocation based on relative attractiveness. This macro, valuation-based approach became the firm’s signature.

The valuation framework

Grantham’s most distinctive contribution to investing has been his development of a rigorous long-term valuation framework. He tracks valuation metrics for various asset classes over decades — price-to-earnings ratios, price-to-book ratios, yields — and observes that they cycle. When valuations reach extremes relative to history, they eventually mean-revert.

This framework has led him to make many contrarian calls: he warned of the dot-com bubble in the late 1990s, called the 2008 housing crash, and has repeatedly warned about valuations in US equities. His accuracy has been mixed — sometimes he is right and ahead of the market; other times he is early and watches valuations extend further.

The public intellectual role

Grantham became known for his quarterly letters, which combined rigorous analysis with accessible writing. He would lay out his valuation framework, show where assets stood relative to history, and argue for a particular allocation. These letters became widely read among institutional investors and contributed to his influence.

He has also been willing to take public stances on large issues. He has warned about the financial system’s fragility. He has emphasized the importance of sustainability and environmental factors to long-term investing. He has been critical of complacency about resource scarcity and climate change.

The 2000s and 2010s calls

In the early 2000s, Grantham warned that housing prices were in a bubble, years before the crisis became obvious. In the mid-2010s, as central banks flooded markets with cheap money, he warned about the dangers of inflated valuations. In the late 2010s, he was skeptical of the tech rally.

These calls were often early or partially wrong, which led to criticism. An investor who followed Grantham’s advice in 2015 would have missed years of strong returns from US equities. Yet Grantham’s longer-term framework — that valuations eventually revert to means — has proven correct, even if the timing of mean reversion has been difficult to predict.

The environmental focus

As Grantham aged, he became increasingly focused on environmental and sustainability issues. He founded the Grantham Foundation for the Protection of the Environment and the Grantham Institute at the London School of Economics. He published research arguing that resource scarcity and climate change posed significant long-term investment risks.

This focus was prescient. By the 2020s, ESG (environmental, social, and governance) investing had become mainstream. Grantham’s earlier focus on these issues positioned GMO to benefit from the trend.

The late career and stepping back

In the 2020s, Grantham began to step back from day-to-day management, transitioning control to younger managers. Now in his eighties, he remains active as a thought leader but no longer runs the portfolio directly. His quarterly letters continue to be read widely by institutional investors.

Legacy and influence

Grantham proved that a rigorous, data-driven approach to valuation could inform long-term decisions. He demonstrated that thinking in terms of centuries-long cycles — the length of human resource availability, the pace of climate change — could inform investment decisions. And he showed that being early to a call, while uncomfortable, is sometimes the price of being right before the crowd.

His influence is particularly strong among institutional investors who have the time horizon and patience to wait for mean reversion. His work on environmental sustainability and resource scarcity anticipated modern concerns about these issues.

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