'We are in the Final Stage of a Superbubble', Warns a Billionaire Investor

It's 1969. A young MBA, fresh out of business school, starts hanging out with his batchmates.

He notices they are making a killing in small, obscure stocks which are going up 5 or 10 times in a few months.

Impressed with their success stories, he starts dabbling in these stocks. He buys one of these stocks and then goes on a vacation with his wife. By the time he returns, his stock is up 3x.

Needless to say, our guy is thrilled. He sells everything else he has and buys more of the same stock. By Christmas, the stock goes up another 5x, making him rich enough to afford a nice Victorian house with a big orchard and a spanking new BMW.

Well, then comes a brutal crash, taking his favourite stock and his next investments, to the cleaners.

He is losing money as fast as he has had made them. And when the dust finally settles, our guy is back to where he started and is left licking his wounds.

Had it not been for this experience in his formative years, Jeremy Grantham would not have become a lifelong student of bubbles and super bubbles.

In his own words, his early experience of making a ton of money and then giving it all back, gave him such a tight slap across his face that he vowed never to repeat the mistake again.

If his track record since is anything to go by, his vow stands unbroken in my view.

Remember the Japanese stock market crash? Well, thanks to his expertise in bubbles, Grantham got out of the Japanese stock market well before the massive wealth destruction and saved his investors from getting decimated.

Same story is repeated in 1999-2000. Grantham sniffed a super bubble from a distance, made an early exit and again, proved to be a saviour for his clients.

Then came the crash of 2008. Grantham was at it again, climbing into the belfry well before everybody else and ringing a bell for anyone listening.

The takeaway for me is clear. If Grantham is warning about a bubble or a superbubble, you better take him seriously.

Well, there is some bad news on this front. Last week, he released a new report on his website and argued that we could be entering what he thinks is the superbubble's final act.

Yes, you heard that right. Grantham believes the current superbubble in the US market features an unprecedented mix of cross-asset overvaluation and we could witness some serious damage.

He argues there are bubbles and then there are superbubbles. The latter being more devastating. He also calls them a 2-sigma and 2.5 to 3 sigma events.

Here's him...

We've been in such a period, a true superbubble, for a little while now. And the first thing to remember here is that these superbubbles, as well as ordinary 2 sigma bubbles, have always - in developed equity markets - broken back to trend. The higher they go, therefore, the further they have to fall.

I'm sure you're surprised. This is because we've only just had a rally in the stock market and now, Grantham is talking about a big superbubble that could break in the next few months and lead to massive wealth destruction.

However, such relief or bear market rallies as he likes to call them, are perfectly normal as per Grantham and have usually ended badly.

Here's him again...

My theory is that the breaking of these superbubbles takes multiple stages. First, the bubble forms; second, a setback occurs, as it just did in the first half of this year, when some wrinkle in the economic or political environment causes investors to realize that perfection will, after all, not last forever, and valuations take a half-step back. Then there is what we have just seen - the bear market rally. Fourth and finally, fundamentals deteriorate and the market declines to a low.

Grantham signs off with the warning that if history repeats itself, even the current superbubble will end in tragedy with his only wish being that it be a minor one.

Now if you look at the Indian stock market, there does not seem to be any tell-tale sign of a superbubble except in a few pockets or sectors maybe.

Neither the narratives nor the numbers point towards anything that should have us super worried.

But what is also true is that if the US and the other developed markets crash in a big way as Grantham has predicted, I don't think we would be immune to it.

The only difference would be that our markets may fall a lot less than the developed ones. This could be on account of our economic resilience and liquidity provided by domestic investors.

Therefore, as long as one is focussed on buying fundamentally strong companies without paying too much for them, one should be fine over the medium to long term.

Any outsized correction in the near term should actually be utilised to load up on our favourite stocks at better valuations rather than being a source of fear and panic selling.

Thus, while Grantham could be correct about the US stock market, I think even he will agree that India is nowhere close to being a superbubble. Therefore, any knee-jerk reaction will be an opportunity for Indian investors.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter

PS: Talking of opportunities, here's a great opportunity that I highlighted in my recent video about building a market beating portfolio. Do check it out.