In his year-end letter, Jeremy Grantham says that equities are once again significantly overpriced, and that investors haven’t learned the lessons of recent market crashes. But, he adds, stocks will likely head higher in the short term.

“All investors should brace for the chance that speculation will continue for longer than would have seemed remotely possible six months ago,” writes Grantham. ” I thought last April that themarket (S&P 500) would scoot up to 1000 to 1100 on a ypical relief rally.  Now it seems likely to go through 1200 and possibly higher.  The market, however, is worth only 850 or so; thus, any advance from here will make it once again seriously overpriced, although the high quality component is still relatively cheap.”

In terms of foreign markets, developed markets look like they are a bit overpriced, Grantham says, and emerging markets are more overpriced. In addition, fixed income investments seem “badly overpriced, especially cash.”

But the poor returns available on cash and fixed income investments doesn’t mean that investors will flock to stocks over the longer term, Grantham says.

“The real trap here, and a very old one at that, is to be seduced into buying equities because cash is so painful,” he writes. “Equity markets almost always peak when rates are low, so moving in desperation away from low rates into substantially overpriced equities always ends badly.”

Grantham remains high on high-quality stocks. He says he’s very slightly underweighting global equities, and tilting the equity portfolio of his portfolio to quality. “And if equity markets are indeed driven higher in the next six months, which … now looks to be at least 50/50, we will very slowly withdraw equities,” he says.