Investing experience is a powerful weapon.
More and more, I believe that we have seen today’s market setup before.
That pleases me because I know how to profit from it.
Last time we had the market setup we have today, I watched a great investing team generate an incredible profit.
Today, I’m going to tell you about a lesson I learned 20 years ago that is still relevant today.
Then, I’m going to tell you how one of the greatest investors of our generation is positioning his firm to profit in the months and years ahead.
While the Market Crashed, This Fund Rose 71% in a Year
Some things you just never forget.
Twenty years ago, I was living in Bermuda working at a hedge fund administrator.
I provided accounting services to hedge funds and got to see what they were buying and selling on a weekly basis.
I had the pleasure of working with some of the greatest investors in the world.
It was a sweet gig, to be sure. Pink sand beaches, a crystal clear ocean and wonderful weather year-round.
I loved watching how these world-class hedge funds operate.
Then, in 2000, the technology bubble popped and the stock market crashed.
But one fund had been positioned for this for months.
Week after week, Orbis Funds posted excellent results as the rest of the market was melting down.
Each Thursday, I raced to work to see how the fund had performed over the past seven days.
It was exciting – I felt like I was a part of what was going on.
In 2001, the first year of the bear market, this fund notched a 71% return while the market crashed.
The lesson I took away from watching this outperformance is that what this hedge fund did was incredibly simple.
It is also the exact same thing that another investing legend is doing right now…
I Don’t Plan to Just Watch the Trade This Time…
Grantham, Mayo, Van Otterloo & Co., or GMO, is an investment firm led by the investing legend Jeremy Grantham.
What GMO sees in the stock market today is the same thing my hedge fund client saw 20 years ago.
There is an absurdly wide spread in valuation between “growth” and “value” stocks.
That means the expensive stocks are far too expensive and the cheap stocks are way too cheap.
The same market conditions are back – and the trade that will help GMO profit is fairly basic.
GMO launched a fund that shorts the most expensive growth stocks and goes long the cheapest value stocks.
That means GMO is positioned to profit from both the expensive stocks falling and the cheapest stocks going higher.
The underlying data shows that the fund’s timing looks spot-on.
Value stocks have underperformed badly for the last 10 years.
Over that time, the Russell 1000 Value Index has gone up only 165% while the Russell 1000 Growth Index has gone up 415%.
That is one of growth’s largest outperformances over value over any 10-year period in history.
But unlike GMO, I have no interest in shorting stocks. I don’t think you should either.
What I am very interested in, however, is owning value stocks. I believe they will outperform over the next several years, potentially by a wide margin.
Exactly 20 years ago, growth stocks were very expensive and value stocks were very cheap.
That meant it was time to buy value.
That time has come again. The tide is starting to change.