Black sea sunset

The ultimate career risk (OPM)

How would you manage an investment portfolio if your life depended on it?

I loved this thought exercise from Jeremy Grantham (the G in GMO). You’ve been charged with managing Stalin’s pension. Your task: generate a 4.5% real return per year (after inflation) over the next 10 years. Fall short and you’ll be shot (the ultimate career risk!). Meet or exceed the 4.5% and you’ll be rewarded with riches and a villa on the Black Sea.

How would you construct a portfolio in this scenario?* As Grantham outlines, it requires a very unorthodox approach** (which is why many will fall short over the next 10-15 years).

As an aside, some will say “no problem, doesn’t the stock market return 10-12% per year?” Others, perhaps those that have been through a few market cycles (or who have studied financial history), will say “given current valuations, I better put my affairs in order.”


1) “Stocks are getting more efficiently priced…asset classes are absolutely not.”

2) “Asset allocation advice should not be offered unless you are willing, on rare occasions, to make major bets and accept a big dose of career and business risk.”

3) Market timing can add value (for a lucky few) but, especially when rates on cash are zero, better to stay invested and tilt towards geographies and asset classes with higher expected returns (they are often those that have performed poorly over the recent past).

4) How you’d invest if measured only at the end of 10 years is, from time to time, very different from how you’d invest if measured over 2-3 year periods (see 2000, 2007).

I’m sure a lot of people will read the piece, see the date, and say Grantham has been wrong for three years. And that is precisely his point. “That is…why these opportunities get to exist in the first place.” As Grantham notes, “Keynes explained career risk (and how it encouraged momentum investing) first and still best in Chapter 12 of The General Theory in 1936: Never, ever be wrong on your own. If you are ‘you will not receive much mercy.'”

This exercise also underscores why individuals investing for their own retirement – if they don’t get in their own way – often outperform professional investors. Even though the individual investors spend less time, have fewer resources, and don’t have the same access.

The full article is worth a read: Grantham – Career Risk and Stalin’s Pension Fund.

*I’m sure many will say the answer is to add more PE. I agree that top funds are likely to offer decent returns (but, since driven by the same underlying equity exposures, will be lower than they have been). Plus, by definition, only 25% of funds can be top quartile. And hard to identify them in advance (for LBOs, there is little return persistence since 2006).

**I’m sympathetic to those managing OPM. Even if they know the right answer (and many do), they still must answer to trustees, a principal, etc. Their performance is still measured over 2-3 years. Even GMO only has ~25% in emerging today (in its benchmark-free fund).

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