Dumbfounded. That’s the best word I can think of to explain how a number of investors feel when trying to comprehend what’s transpired in the financial system in recent times. Even experienced Wall Street veterans didn’t recognize this latest storm until gale force winds were pounding at the doors of the “old firms.” You would think these guys, of everyone on the Street, would understand the intricacies of the global financial system, right? Wrong. Such knowledge, it appears, escapes even the best investors. Fabrice Taylor wrote on the online edition of Globe and Mail (Canada) today:

My job would be a lot easier if I actually understood the way the global financial sector works. I mean really understood, as opposed to broad-brushed sketches of intelligence gleaned from books and media. Abstract art doesn’t really cut it in this case. Realism is what you need.

Don’t feel too badly if you don’t get it either. You’re not - we’re not - alone in that painful ignorance. Jeremy Grantham is one of the sharper investing minds in the world. He’s been around for decades and is chairman of GMO, a Boston-based institutional money manager with $120-billion (U.S.) of other people’s money. I’ve heard him speak and he has a knack for explaining the complex with clarity and conviction.

Mr. Grantham and his colleagues are opinionated and, unlike most of his index-hugging counterparts in the grey world of investment, bold actors. Mr. Grantham started warning about the credit crisis three years ago, and never stopped. He adjusted his portfolios. He saw housing as a huge bubble and warned that the fallout would be brutal…

But here’s the kicker: For all his prescience, for all his deserved confidence when it comes to commenting on financial markets, Mr. Grantham knows next to nothing about the financial system. That’s not a slight, it’s his own admission.

“I want to emphasize how little I understand all of the intricate workings of the global financial system. I hope that someone else gets it, because I don’t. And I have no idea, really, how this will work out. I certainly wish it hadn’t happened. It is just so intricate that all I can conclude, by instinct and by reading the history books, is that it will be longer, harder and more complicated than we expect.”

Feel better? Probably not, but at least we’re not as dumb as we thought we were. And rest assured that he probably knows more about it than the majority of the economists and market strategists you see quoted or interviewed on TV.

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Also in the piece, Taylor reiterated what Grantham told Barron’s recently regarding GMO’s investment strategy:

He’s a little more sanguine today, telling Barron’s that some stocks are starting to look attractive, adding that the firm’s next move would be to start buying emerging markets and small-cap international names, although there’s no hurry, in his view.

Source:

“Dazed and confused by the meltdown? You’re not alone”
Fabrice Taylor
Globe And Mail (Canada), October 15, 2008

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