Hussman Says Look Out Below For Stock Market

[TBV]

Strictly speaking, Hussman doesn't make "predictions" about what is about to happen in the market.  What he does is utilize an ensemble of market indicators to identify historical profiles which have or have not been favorable to prospective investors.  His approach is to apply that historical record: to see what market outcomes have emanated from conditions most closely associated with the present data. He doesn't run his fund based on what he thinks is about to happen.  And he ritually repeats the caveat that "this time may be different." 

This excerpt is from his description of how the Hussman Funds operate. "We believe that like Warren Buffett and Peter Lynch, the most successful investors share a common trait: discipline. It is important for shareholders to understand that we place a rigid emphasis on disciplined strategy.  We believe that the key to superior long-term returns is to take investment opportunities when the evidence suggests high return/risk tradeoffs on average, and to avoid situations when the evidence suggests low return/risk tradeoffs on average.  Unfortunately, what holds true on average may not hold true in any specific case. All of the Market Climates we consider may experience short-term returns which are both positive and negative. As a result, we may occasionally be defensive during rallies that occur in a negative Market Climate, and aggressive during declines that occur in a favorable Market Climate."

Hussman asserts that this investment discipline is useful over a peak-to-peak or trough-to-trough time frame.  But he readily admits that his fund may lag the market when evaluated during a market cycle which has not yet been completed, such as now.

Every now and then, Hussman shares his personal views on what he thinks is likely to happen, but he is quick to point out that neither his regular weekly analysis nor the operation of his investment funds are based on his personal views.  In his own words, "...a defensive outlook here does not presume, require, or rely on a market crash. Our ongoing discipline is to align our investment outlook with the market return/risk profile that we estimate on the basis of a broad ensemble of evidence that we can test historically and validate in out-of-sample data. That outlook will shift as that evidence shifts, period."

Now, if they wish, folks are entitled to regard quantitative analysis of the market as rubbish.  More specifically, they may criticize Hussman's stress-testing of pre-war and post-war data sets and the negative impact that had on his fund's performance over last two years. Might as well, since he does too and explains (almost every week) what factors led him to take a more defensive stance than he had previously taken. That's all well and good, but when folks label Hussman a "perma-bear" (as some do) that seems undeserved.  He certainly wasn't bearish from 2003-2007.  It remains to be seen whether his approach will be as prescient in the coming decades as it was in the first decade of this century.  Guess we'll just have to wait and see....from the safe vantage point of the HBx4 PP.

[Tiburon]

Again - market predictions are a total waste of time no matter how many words describe the effort.

[stpeter]

Strictly speaking, Hussman doesn't make "predictions" about what is about to happen in the market.  What he does is utilize an ensemble of market indicators to identify historical profiles which have or have not been favorable to prospective investors.  His approach is to apply that historical record: to see what market outcomes have emanated from conditions most closely associated with the present data.

(snip)

It remains to be seen whether his approach will be as prescient in the coming decades as it was in the first decade of this century.  Guess we'll just have to wait and see....from the safe vantage point of the HBx4 PP.

I find Hussman's analysis quite rational, but unfortunately the markets can remain irrational longer than you can remain solvent.

[MediumTex]

Again - market predictions are a total waste of time no matter how many words describe the effort.

If the PP enjoys an edge, it is based upon the complete internalization of this concept.

Once you learn to depend on most market fortune tellers being wrong most of the time, the internal logic of the PP becomes much easier to appreciate.

The rhythm of the PP is hard to follow for one who is trapped in the belief that investing success is about picking the right crystal ball operator.  To this type of ear, the PP probably sounds something like the portfolio equivalent of Thelonius Monk--i.e., seemingly chaotic, but with occasional hints concerning the complexity and subtlety of the underlying structure.