That instinctive caution has led many to tag Grantham a "permabear," someone who's always pessimistic about the markets. He's not a fan of the term, though. A worrier, maybe: He does think we're in the middle of a long-term bear market, one that started in 2000 and that may not end until 2010, at the earliest. But according to Grantham, he's just calling the market as he sees it. If an asset class is in a bubble, he'll say so. And right now, a lot of different assets are looking awfully pricey. Stocks, bonds, real estate - generally speaking, all are valued higher than they should be.

Looking Ahead: Where to Place Your Bets
That's not to say there aren't wise investments to be made, says Grantham. One of the best at the moment? Boring old cash. Fixed-income investments (bonds) are also looking more attractive than they have been, and Treasury Inflation-Protected Securities are fairly valued. Emerging markets - developing countries like India, China, Brazil, and so on - are probably the best long-term bet in equities, and they're relatively cheaper than U.S. stocks.

His biggest idea for the moment: that superhigh-quality investments - perennial market powerhouses like Johnson & ­Johnson, for instance, pose little risk and have a solid record of churning out big profits year after year - are a much better value than riskier ones. Because right now what he calls the "risk premium" is "the lowest you'll ever see in your lifetime." In other words, you're not getting a discount to take risks with your money, as you normally would. When this is the case, you should buy the big, proven moneymakers instead of the fluctuating small-cap growth stocks, because you're getting them at a bargain.

That instinctive caution has led many to tag Grantham a "permabear," someone who's always pessimistic about the markets. He's not a fan of the term, though. A worrier, maybe: He does think we're in the middle of a long-term bear market, one that started in 2000 and that may not end until 2010, at the earliest. But according to Grantham, he's just calling the market as he sees it. If an asset class is in a bubble, he'll say so. And right now, a lot of different assets are looking awfully pricey. Stocks, bonds, real estate - generally speaking, all are valued higher than they should be.

Looking Ahead: Where to Place Your Bets
That's not to say there aren't wise investments to be made, says Grantham. One of the best at the moment? Boring old cash. Fixed-income investments (bonds) are also looking more attractive than they have been, and Treasury Inflation-Protected Securities are fairly valued. Emerging markets - developing countries like India, China, Brazil, and so on - are probably the best long-term bet in equities, and they're relatively cheaper than U.S. stocks.

His biggest idea for the moment: that superhigh-quality investments - perennial market powerhouses like Johnson & ­Johnson, for instance, pose little risk and have a solid record of churning out big profits year after year - are a much better value than riskier ones. Because right now what he calls the "risk premium" is "the lowest you'll ever see in your lifetime." In other words, you're not getting a discount to take risks with your money, as you normally would. When this is the case, you should buy the big, proven moneymakers instead of the fluctuating small-cap growth stocks, because you're getting them at a bargain.

But the immediate question posed by anyone with a 401(k) is: How will the market fare this coming year? Grantham ­reminds us of the predictability of presidential cycles, which reveal a "remarkable" set of data. Historically, during the first year of a presidency, the market is up very slightly. In the second, it's down significantly; in the third, it rockets upward; and in the fourth, it's up more marginally.

That kind of pattern isn't random. As they start to face reelection prospects in their third year, administrations tend to goose jobs, cut interest rates, and spend the cash necessary to make sure the economy is humming when voters go to the polls. And here's the good news: We'll soon be entering the third year of the younger Bush's second term. If historical patterns hold, that could mean a pleasant year for investors, although Grantham doesn't recommend you count on this. "In the end," he says, "value is more important than these technical indicators."

Of course, in Grantham's view, the fundamentals don't warrant such a powerful bull run. It almost pains him to ­admit it. But he's enough of a realist to know that pure reason doesn't always drive the markets. "You don't get rich fighting Year Three," he quips.

The Real World:
Thinking and Investing Globally

Grantham loves to make his investors rich - investors who reportedly include longtime political foes John Kerry and Dick Cheney (although the tight-lipped company declines to discuss its clients). His firm has outperformed the
market for seven consecutive years.

That's partly thanks to Grantham's global perspective, which helps him spot opportunities around the world. And that stems from his upbringing: A native of England, he studied at the University of Sheffield before making his way to Harvard Business School. As a self-styled mid-Atlantic personality - one whose stubborn English ­accent remains, if only in watered-down form - he sees U.S. stocks as only one piece of a much larger puzzle.