Jeremy Grantham, one of the few who saw the current credit crisis coming, provides some thoughtful comments on the crisis, asset bubbles, the stock market’s current valuation and how individual investors might consider looking at the equity markets right now. Speaking with Consuelo Mack on WealthTrack, Grantham (co-founder and chairman of GMO LLC), who has been bearish on the stock market for some time, says that for the first time in over two decades stocks look “reasonably cheap”. He also believes that going forward investors will favor large, blue chip companies over riskier types of stocks. But, while Grantham thinks stocks are attractively priced, he advises those investors with large cash balances to scale their way back into the market because in his estimation the market could easily see further losses should the current slowdown turn into a deep, prolonged recession.

Grantham also discusses two key challenges facing investors. One is known as the “curse of the value manager”. Essentially, he says, value managers are paid to buy cheap assets (and so they hang onto or add to their holdings in times like these when the market is falling), but they are also paid to unload expensive assets (and so they sell during periods like the late 1990s when stocks look expensive but may keep rising for a bit). The other is “regret minimization”, which involves the tension between buying too soon (and thus realizing shorter-term losses) and buying too late (and thus missing out on a significant rally). Grantham says he balances between these two tensions by scaling into the cheapest areas of the market to try and minimize this type of regret.