4.4%.

That's what Jeremy Grantham believes large-cap stocks will return -- after inflation -- on an annualized basis over the next seven years.

Is that good enough for you?

Who on earth is Jeremy Grantham?
Jeremy Grantham is the co-founder of investment firm GMO, which has almost $80 billion in assets under management.

Grantham is often dismissed as a "perma-bear" when his views go against Wall Street's institutionalized optimism -- but the truth is, he's a rock-solid investment thinker, grounded in reality, who calls 'em like he sees 'em.

He believes that "mean reversion is the most powerful force in financial markets." In other words, periods of abnormally high returns must be balanced out by periods of abnormally low returns, and this holds true across the gamut of different assets, whether it be commodities, stocks, or bonds.

On that basis, at the end of 2001, Grantham predicted that the S&P 500 would suffer an annualized decline of 1.1% over the following seven years -- which was decidedly optimistic since the annualized real return turned out to be negative 3.9%.

In July 2007, as the credit crisis was in its infancy, Grantham wrote: "In five years, ... at least one major bank (broadly defined) will have failed." We've all witnessed the multiple failures, rushed takeovers, and government rescues in the financial sector since then.

So, it's worth taking his predictions seriously.

4.4%? Seriously?
While the S&P 500 is still down 37% from its all-time high in October 2007, it has gained 45% since its March 9 low, but it's still down over 40% from its all-time high in October 2007. That rally has set the stage for investors to earn 4.4% -- below the 6.5% average historical return on stocks -- going forward, which is nothing to sneeze at (remember that this is an after-inflation return). That might not sound like a big number, but it's nothing to sneeze at, either -- at 1.81%, inflation-indexed Treasury bonds are yielding less than half that amount.

The current bear market has been a source of enormous pain for investors -- but from the point of view of the prospective stock buyer, it's an opportunity since stocks are at lower valuations than they have been in years.

In fact, at the end of January Grantham called U.S. blue chips "manna from heaven"; indeed, when the credit crisis began to escalate, he said, "they were about as cheap, on a relative basis, as they ever get."

I wanted to verify that claim, and I was able to confirm that, even after the recent rally, over a third of the non-financial stocks in the S&P 500 currently sport price-to-book value multiples that are in the bottom decile of their range since the beginning of 1995. Even in the following sample of stocks that meet that criterion, you can't fail to notice some superb companies:

Price/Book Value

Forward Price/Earnings

Amgen (Nasdaq: AMGN)

3.09

13.3

Automatic Data Processing (NYSE: ADP)

3.71

15.3

Chesapeake Energy (NYSE: CHK)

1.18

9.4

Home Depot (NYSE: HD)

2.40 Continued...