For the record Mr Grantham and I share similar views on commodity. I believe that long-term there is a great story in commodities as China and other emerging markets continue to consume not only fossil fuels but as the world population grows potash, fertilizers, seeds, or anything that goes into food production or processing. However I think that there is enough short-term risk out there in which you don't want to go all in. Remember these same investment ideas were good back in 2007 thru 2009 and these stocks took a hit as the financial crisis melted just about everything in the commodity sector.
- Avoid lower quality U.S. stocks but otherwise have a near normal weight in global equities.
- Tilt, where possible, to safety.
- Try to avoid duration risk in bonds. For the long term they are desperately unattractive. Don’t be too proud (or short-term greedy) to have substantial cash reserves. Admittedly, this is the point where we at GMO try to be clever and do a little better than the minus 1% real from real cash – and, so far, with decent success.
- I like (personally) resources in the ground on a 10-year horizon, but I am nibbling in very slowly because, as per my Quarterly Letter on resources in April 2011, I fear a major short-term decline in commodities based on a combination of less bad weather – which has been bad, but indeed less bad – and economic weakness, especially in China. Prices have declined, often quite substantially, since that letter. However, I believe chances for further price declines in resources are still better than 50/50 as China and the world slow down for a while, and the weather becomes a bit more stable.
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