Investors should be overweight in cash, which gives them security as well as the option to take advantage of other investments if prices fall, fund manager Jeremy Grantham told CNBC Thursday.
"It [the Federal Reserve] wants us to go out there and buy stocks, which are overpriced because bonds they have manipulated into being even less attractive," said Grantham, who is chief investment strategist of Grantham Mayo Van Otterloo , a Boston-based asset management firm, and a respected voice in the financial world.
"So, we’re being forced to choose between two overpriced assets. That is not always a terrific choice to make because there is a third choice, and that is, 'don't play the game and hold money in cash.' ?
"And cash has what people don't appreciate fully. And that is its 'optionality.' In other words, if anything crashes and burns in value—say the U.S. stock market—if you have no resources, it doesn't help you. If the bond market crashes, and you have no resources, it doesn't help you. And what cash is is an available resource. It buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value."
(Watch video of Maria Bartiromo's entire interview with Grantham below.)
Grantham also recommended buying a few shares of such “franchise” stocks, as Coca-Cola or Johnson and Johnson , a solid position in emerging markets, which are a “little overpriced, but they’ve got potential.”
Grantham said he wasn’t recommending Coca-Cola or J&J specifically, but used them as an example of the quality of stocks the investor should have in a portfolio.
Grantham also recommended investing in such commodities as oil and copper for the long term of 10 to 20 years. For institutional investors, Grantham said a good mix is to be overweight in franchise companies, modestly overweight in emerging markets, underweight in everything else, plus a lot of cash and “patience.”
Grantham, a strong critic of the Federal Reserve, thinks the central bank should stick to controlling the money flow. He’s against its stimulus efforts, including its recent announcement to try and boost the economy through $600 billion in quantitative easing (QE).
“The Fed has spent most of the last 15, 20 years manipulating the stock market, whenever they feel the economy needs a bit of a kick,” he added. “I think they know very well that what they do has no direct affect.”
You can see excerpts of Grantham's interview with Maria Bartiromo during CNBC's daytime programming today, including an extensive portion on "Closing Bell" at 4pm ET.
Jeremy Grantham is chief investment strategist for Grantham Mayo Van Otterloo, not chairman, as was reported in an earlier version of this story. The story has also been updated with additional quotes from Grantham.