Monday, December 07, 2009
John Hussman's last two weekly commentaries should be considered "must reading" for anyone with any money in the stock market who still thinks they're doing anything remotely resembling Benjamin Graham style "investing".
Last week's Reckless Myopia was his mea culpa for being so risk averse this year.
From a long-term perspective, my record is very comfortable. But clearly, I was wrong about the extent to which Wall Street would respond to the ebb-and-flow in the economic data – particularly the obvious and temporary lull in the mortgage reset schedule between March and November 2009 – and drive stocks to the point where they are not only overvalued again, but strikingly dependent on a sustained economic recovery and the achievement and maintenance of record profit margins in the years ahead.Well, clearly, "reckless myopia" is what follows monetary myopia, a condition that exists within the central banks around the world and, in this decade, it's hard to find fault with those who are doing exactly what the Fed economists want them to do - embrace risk.
I should have assumed that Wall Street's tendency toward reckless myopia – ingrained over the past decade – would return at the first sign of even temporary stability. The eagerness of investors to chase prevailing trends, and their unwillingness to concern themselves with predictable longer-term risks, drove a successive series of speculative advances and crashes during the past decade – the dot-com bubble, the tech bubble, the mortgage bubble, the private-equity bubble, and the commodities bubble. And here we are again.
This week in Credit Crises Generally Require Multi-Year Adjustments he expands on his prior musings and states the obvious, something that probably isn't all that obvious to most people, certainly not many on Wall Street.
Over the past decade, the stature of the market as an effective discounting mechanism has gradually eroded. The observation and analysis of potential risks – though essential to long-term investing and loss avoidance – is far less actionable than one might expect. Investors will evidently speculate as long they have dice in their hands and the casino is not visibly on fire. In hindsight, less concern about the eventuality of a second wave of credit losses (which I still fully expect), might have allowed us to capture a larger portion of the recent advance, at least moving our year-to-date returns into two digits.The choice of words here is quite interesting - "Investors will evidently speculate" - because it has long been my suspicion that most people who buy stocks don't have a clue whether they are investing or speculating, or that there's any distinction between the two.
Concerns such as valuations, discounting mechanisms, and the like all seem to have been subverted by CNBC proclamations that XYZ Corp. just beat earnings by a penny, something that seems to happen every quarter, through good times and bad.
Over the last twenty five years (with a few notable interruptions earlier in the decade) the world has been conditioned to think of the stock market as something that simply goes up - the place where people put a pile of money so that, someday, they can withdrawal an even bigger pile of money.
Turns out, it doesn't work that way all the time, yet, you wouldn't know that from the renewed equity market fervor this year and John finds that puzzling.
This is something of a personal struggle, because I see my main fiduciary duty as focusing on long-term performance and avoiding major losses where possible. Short-term speculative participation is often what gets sacrificed, but that can be very uncomfortable – especially over the short-term.All of this might be a lot easier for Hussman to deal with if not for the fact that Money Magazine crowned him the Best Bear Market Money Manager Around in April of this year as investors of all stripes were licking their wounds.
Again, however, there is undoubtedly some middle ground that we can exploit while still keeping a tight rein on significant risks. I have to keep reminding myself that Wall Street, as a rule, doesn't seem to share all of our fiduciary concerns.
If I'm correctly recalling the net assets figures from earlier this year, his flagship Hussman Strategic Growth Fund (HSGFX) has more than doubled in size in recent months to over $5 billion, however, the year to-date gains stand at around five or six percent.
It turns out that risk aversion can be a humbling experience.