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Jeremy Grantham

Investing Rules

Indexing is hard to beat, and relative passivity is not a vice.

The investment management business creates no value, but it costs, in round numbers, 1% a year to play the game.

In total, fund managers are the market and given the costs they collectively must underperform. The U.S. stock market is approximately efficient - 95% or more of all market moves are unknowable noise and perhaps 5% are manageable (or predictable).

Historically, equity investors have over-paid for comfort, and excitement.

Paying up for comfort (stability, information, size, consensus, market domination, and brand names) and excitement (growth, profitability, management skills, technological change, cyclicality, volatility, and most of all, acceleration in all these) as growth managers do for example, is not necessarily foolish, for their clients also like these characteristics.

Conversely, when a value manager is very wrong - as he will be sooner or later - he will be fired more quickly than a growth manager.

One of the keys to investment management is reducing risk by balancing Newton (momentum and growth) and regression (value).

Bodies in motion tend to stay in motion (Newton's First Law). Earnings and stock prices with great yearly momentum tend to keep moving in the same direction for a while, perhaps because economic cycles are, on average, longer than a year.

Be aware that everything concerning markets and economies regresses from extremes towards normal faster than people think (e.g., sales growth, profitability, management skill, investment styles, and good fortune).

Taken from The Global-Investor Book of Investing Rules

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