If a person can be too smart for his own good, as the aphorism goes, portfolio manager John Hussman may be feeling the agony of high intelligence right about now.
His latest shareholder newsletter, published Monday, describes the hard lessons he has learned related to his persistent bear market calls that have yet to materialize.
While Hussman assures loyal shareholders that “we’ve addressed these challenges, the lessons were hard-won, and nobody in their right mind should imagine that they have not been incorporated into our work,” the Ph.D. portfolio manager also says he hears he is “a polarizing figure in internet chat circles.”
He does not name his critics — indeed he says he eschews the comments of “anonymous strangers on the Internet” — yet one recent comment that conceivably could have influenced the timing of his mea culpa is a non-anonymous critique, written with a sense of embarrassment, by Eric Nelson.
The financial advisor and prolific investment commentator marshals data showing, among other things, that even a portfolio of high quality short-term bonds outperformed the Hussman Strategic Growth fund over the past 14 years.
In two recent posts, the Servo Wealth Management principal sounds apologetic for drawing such unflattering attention to the performance of a portfolio manager he acknowledges is “one of the smartest and most well-researched investment managers in the market today.”
Indeed, on more than one occasion no less than the widely followed hedge fund manager Jeremy Grantham has endorsed Hussman’s analytical acumen.
Rather, to Nelson, a Dimensional Fund Advisors asset-class investor, Hussman’s persistently poor performance is an object lesson in the futility of trying to outsmart the market, a temptation to which some very smart people succumb either through security selection or market timing.
So while Hussman, seeking to avoid an overvalued market, minimized shareholder damage with a mere 9% loss in 2008 compared to the nearly 26% loss of a balanced 65% stock / 35% bond portfolio, the hubris of market timing ultimately redounded to the disadvantage of Hussman’s shareholders.
That, Nelson illustrates through the 29.1% loss Hussman’s shareholders have suffered over the period January 2008 through October 2014. In other words, Hussman won the battle of 2008, avoiding the worst market carnage that year, while losing the war played out over a lengthy recovery in which that same balanced fund gained 43.5%, a performance gap of greater than 70%.
But to Nelson, that underperformance understates the price of market timing.
Noting that Hussman was calling stocks “overvalued” back in 2003 in the period following the 2001-2002 tech collapse, Nelson calculates that Hussman’s fund earned a total of 3% from January 2003 until October of this year.
A balanced 65/35 fund earned nearly 183% net of fees during the same period.
Nelson calls this 14-year-plus result “one of the worst stock market performances in modern history.”
In an updated, second post, Nelson responds to critics who think he was cherry-picking the data by comparing Hussman’s results to a broader range of rival investment options and over a longer time period starting from August 2000.
He found that Hussman’s fund has “underperformed every combination of stocks and short-term bonds from 100/0 all the way to 0/100” (meaning, in the latter case, a portfolio of exclusively short-term bonds).
Even in that most extreme case of a 100% short-term bond portfolio, whose 3.4% annualized return modestly outperformed Hussman Strategic Growth fund’s 3.2% return, the bond fund also enjoyed the advantage of cushioning investors from losses in 2008, enjoying a 5.1% return, or 14 percentage points ahead of the Hussman fund.
Turning the investment frame away from bonds and toward equities, Nelson notes the irony that Hussman avoided the 31.7% carnage that an 80/20 stock/bond fund experienced in 2008, compared to his fund’s mere 9% loss. But that same aggressive balanced fund went on to average a net positive of nearly 9% over the 14-year period, nearly 5 ½ percentage points over the Hussman Strategic Growth fund’s annualized return.
Nelson’s pained conclusion from this data-dredging exercise:
“Whether it’s a naive strategy of trying to sell stocks before the storm clouds surface, or more complex efforts that include valuation-based or economic-cycle timing and elaborate hedges designed to minimize losses, these tactics fail far more often than they succeed.”
Worse, from a pracitical point of view, most clients would find it hard to endure such a strategy, the Oklahoma City-based independent advisor says, citing data showing that 80% of assets have fled the fund since 2009 and that actual fund investors attained results nearly 2% lower than that of the fund itself.
Arguing that market timing is a cure worse than the disease, Nelson calls for a broadly diversified asset-class strategy that ordinary clients can live with when bear markets kick in.
As for Hussman, he admits in his Monday shareholder letter to having been humbled by attention to his fund’s investment performance:
“I certainly deserve some criticism—some of the damage to my reputation in this half-cycle was self-inflicted, and despite the adaptations we’ve made, we haven’t yet erased the scars.”
But back at the technical analysis for which he is best known, the portfolio manager freshly warns that “the S&P 500 is now double its historical valuation norms,” and he quotes George Orwell thusly:
“The further a society drifts from truth, the more it will hate those who speak it.”
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