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With the repeated caveat that prudent investors should invest exclusively or nearly exclusively on a multi-year

value forecast, my guesses are:

1) That this year should continue to be difficult with the February 1 to October 1 period being just as likely

to be down as up, perhaps a little more so.

2) But after October 1, the market is likely to be strong, especially through April and by then or in the

following 18 months up to the next election (or, horrible possibility, even longer) will have rallied past

2,250, perhaps by a decent margin.

3) And then around the election or soon after, the market bubble will burst, as bubbles always do, and will

revert to its trend value, around half of its peak or worse, depending on what new ammunition the Fed

can dig up.

The bull market may come to an end any time, indeed as I write it may already have happened. It could be

derailed by disappointing global growth, profits sagging as deficits are cut, a Russian miscalculation, or, perhaps

most dangerous and likely, an extreme Chinese slowdown. But I believe it probably (i.e., over 50%) will not end

for at least a year or two and probably not before it reaches a level in excess of 2,250 on the S&P 500. Prudent

long-term value investors will of course treat all of the above as attempted entertainment (although I believe all

statistically accurate) and be prepared once again to prove their discipline and man-hoods (people-hoods) by

taking it on the chin.

I am not saying that this time is different (attention Edward Chancellor). I am sure it will end badly. But given

this regime of the Federal Reserve and given the levels of excess at other market peaks, I think it would be

different to end this bull market just yet.

>>> In Defense of Risk Aversion (Page 16-23)

Conclusion

Believing that value matters is not quite the same thing as believing that valuations mean revert. If you believe

that value matters but valuations do not necessarily mean revert, you should move your portfolio of risky assets

around pretty aggressively as valuations shift among the various risky assets. But you should keep a fairly

constant allocation to risky assets over time except in the rare instances where valuations are so extreme that

risky assets are actually priced to lose out to lower-risk assets. That strategy will outperform a naïve strategy

over time, but if valuations do mean revert, it is substantially sub-optimal. If valuations mean revert, you can

improve the risk/reward trade-offs of your portfolio substantially by adjusting how much risk you take through

time, taking more risk when the return to risk is high, and less when it is low. Since we at GMO believe in

reversion of valuations, we move our allocations to risky assets around fairly aggressively over time, reducing

their allocations not just when risky assets have a worse expected return than lower-risk assets, but whenever

the amount of extra return available is noticeably worse than normal. In our view, today’s opportunity set for

investors is decidedly sub-par, even if it is not as disastrously bad as 2000 or 2007, and we are reducing risk

accordingly. And I warmly look forward to the day we feel the need to write a defense of why we are taking

so much more risk than normal just when everything looks like it is going wrong and risk seems unacceptably

high.