Jeremy Grantham, 78, is a legendary value investor. He’s chief investment strategist at the Boston-based money management firm GMO. Grantham’s reputation is that he’s unusually prescient about long-term market forces and, at the same time, usually way early in his judgment calls.

The Wall Street Journal recently reported that Grantham is out of step once again and clients are losing patience. Grantham sees U.S. stocks as highly valued and, while he doesn’t see equities as a bubble poised to burst, he expects long-term returns will disappoint. “The consequences are dismal for investors: We are likely to limp into the setting sun with very low returns,” he writes in GMO’s latest quarterly letter.

Like many people in the finance industry, I closely follow Grantham’s insights. We’ll eventually learn whether his skepticism is warranted or not. In the meantime, his intellectual independence and current experience holds valuable lessons for individual investors.

First, the actively managed investment industry offers too many “me, too” portfolios that essentially mimic the overall market — and charge a high fee to boot. Fact is, maintaining a healthy dash of agnosticism about the consensus is hard to do when markets go against your point of view. There is safety among the professionals in sticking with the crowd. “Worldly wisdom teaches it is better for reputation to fail conventionally than to succeed unconventionally,” economist John Maynard Keynes once observed.

Lesson No. 1: Why pay a high fee to join the actively managed conventional wisdom mutual fund crowd? Individual investors can easily create well-diversified, low-cost, long-term portfolios with broad-based index funds.

Second, individual investors have a critical edge on professional money managers like Grantham when it comes to investing with convictions that run against the consensus outlook. The pros won’t stick around for long unless the contrary bet pays off fast. In sharp contrast, individual investors are responsible only to themselves and can exercise far more patience than the professional money manager.

Lesson No. 2: If you want to spice up an index fund-based portfolio, you can make small satellite investments to your core strategy. A smart, contrary stance on the market, an industry or a company might pay off nicely.

If you’re wrong, the losses won’t hurt your retirement or children’s education fund. Either way, you’ll have fun matching wits with other investors.

 

Chris Farrell is senior economics contributor, “Marketplace,” and commentator, Minnesota Public Radio.