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Leap of Faith


giofranchi
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Our economic challenges will be addressed in time, but they are likely to involve much greater restructuring and much slower progress on deficit reduction than the capital markets seem to contemplate. Europe will solve its problems, but most likely through a departure of stronger countries from the Euro, followed by a combination of aggressive restructuring and monetization. We will get through all of this, and both the economy and the financial markets will do fine in the longer-term, but to imagine that there will not first be major challenges and disruptions is a leap of faith – and a leap over a century of economic and financial history that screams otherwise.

 

John P. Hussman, October 1, 2012

 

giofranchi

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@giofranchi almost all your posts are about the macro picture, are you a macro investor?

 

Not really! I don’t believe Mr. Hussman either thinks of himself as a “macro” investor. I think he calls himself a “value” investor. Of course, he has developed his own way of value investing. Just like any great investor, Mr. Hussman doesn’t subscribe to any standard way of investing. Instead, he has found what really works for him, and what fits his personality the most.

I guess he recognizes that a lot of our investments are in public companies, and not in private enterprises. Public companies are subject to two kind of risks: business specific risk and market risk. 90% of the time you can think only about the former and completely forget about the latter. But the rest 10% of the time you’d better be aware of both. And today we find ourselves in that rare and perilous 10%.

He certainly might be wrong, but there are a lot of things in his analysis that I like and I agree with.

 

giofranchi

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Hussman is smart, but I don't think he is a great investor. His fund has trailed the market and even his peers over the past decade.

 

http://quote.morningstar.com/fund/f.aspx?t=HSGFX

 

He is actually in the bottom 100%.

 

Now, to be fair to him, he has done well since inception (2000).

 

The problem with macro is that you are putting the odds against you dramatically. Yeah, you're probably going to be right when the big drops come (2008) but at what cost?

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Hussman is smart, but I don't think he is a great investor. His fund has trailed the market and even his peers over the past decade.

 

http://quote.morningstar.com/fund/f.aspx?t=HSGFX

 

He is actually in the bottom 100%.

 

Now, to be fair to him, he has done well since inception (2000).

 

 

 

stahleyp,

I don’t think you should judge Mr. Hussman’s return the way Morningstar suggests. First of all a 3-year timeframe is completely meaningless and deceiving. Second, they say the risk he runs is average. Vice versa, I think that the risk he runs, I mean the probability of incurring a permanent loss of capital, is extremely low. Think of it this way: if, investing in public companies, the two most significant risks are 1) business specific risk, and 2) market risk, he is very successful in minimizing both.

1) He employs a basket approach of investing in equities, so he puts a very small amount of capital in each idea, thus minimizing business specific risk. Anyway, the basket of equities he chooses has always beaten the S&P500 by an appreciable margin, so he also shows some business acumen!

2) He is very effective in controlling market risk through his options strategy. I find it interesting that both Mr. Hussman and Mr. Watsa went 100% market neutral together in April/May 2010.

So, as far as I can see, since inception Mr. Hussman has trounced the S&P500 (he has also beaten the Russell2000, albeit by a smaller amount), with a strategy that allows him (and his shareholders) to run almost no risk. So, if we agree that the true measure of performance is return/risk (beware, I don’t mean return/volatility!!), than Mr. Hussman is very good indeed!

 

giofranchi

 

 

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gio,

 

thanks for your thoughts. I do like your posts and getting different perspectives on things.  That being said, the period I quoted was 10 years - that's been a full market cycle. He has underperformed his peers and the market. We could pretty easily make the argument that the reason he is beating the S&P 500, since inception, at all is because he started in July of 2000 - near the market top. BEARX (a bear fund) has also beaten the S&P 500 since July of 2000 (although by not quite as much).

 

If you're investing for a 20 year period, why would you invest with him and not an excellent value manager? We all know that volatility does not equal risk.

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gio,

 

thanks for your thoughts. I do like your posts and getting different perspectives on things.  That being said, the period I quoted was 10 years - that's been a full market cycle. He has underperformed his peers and the market. We could pretty easily make the argument that the reason he is beating the S&P 500, since inception, at all is because he started in July of 2000 - near the market top. BEARX (a bear fund) has also beaten the S&P 500 since July of 2000 (although by not quite as much).

 

If you're investing for a 20 year period, why would you invest with him and not an excellent value manager? We all know that volatility does not equal risk.

 

stahleyp,

actually, I think that a 10-year timeframe comprises 1 and a half market cycles: 1 bull phase during 2003-first half of 2007, 1 bear phase during second half of 2007-first half of 2009, and another bull phase during second half of 2009-2012. Instead, the timeframe since inception comprises two full market cycles, so I think it is more meaningful.

Having said that, I don’t invest with Mr. Hussman, while I invest with Mr. Watsa!

Just because I quoted Mr. Hussman, doesn’t mean that I agree with everything he does… In particular, I clearly don’t share his basket approach of investing in equities. My firm’s portfolio is very concentrated, and I like to put meaningful amounts of money in my best ideas.

Vice versa, just because I don’t share his basket approach of investing in equities, doesn’t mean that there is nothing useful in his work… In particular, I like the idea that public companies are subject to market risk. Remember Mr. Buffett’s comments on BRK’s investment in COP: even though he was sure that COP in the future would be worth much more than he paid for, BRK had lost billions for its shareholders anyway. Because the capital invested in COP in 2007 could have been put to much better use a year later.

Just because I think the idea of market risk might be useful, doesn’t mean that I think it is always useful… For instance, I wouldn’t worry about market risk in a secular bull market, and I wouldn’t worry about market risk even during a secular bear market at market cycle bottoms… but I would be careful during a secular bear market at market cycle tops!

Many talk about “macro” as impossible to do: I don’t think that recognizing a secular bear market in equities, and recognizing that market prices are expensive, is impossible to do. I agree that a lot of things about “macro” are impossible to forecast correctly and consistently. But to say that EVERYTHING is impossible, and so that EVERYTHING should be overlooked, is to take a good idea to its extreme consequences… Always something very dangerous to do!

 

giofranchi

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Hussman is smart, but I don't think he is a great investor. His fund has trailed the market and even his peers over the past decade.

 

http://quote.morningstar.com/fund/f.aspx?t=HSGFX

 

He is actually in the bottom 100%.

 

Now, to be fair to him, he has done well since inception (2000).

 

 

 

stahleyp,

I don’t think you should judge Mr. Hussman’s return the way Morningstar suggests. First of all a 3-year timeframe is completely meaningless and deceiving. Second, they say the risk he runs is average. Vice versa, I think that the risk he runs, I mean the probability of incurring a permanent loss of capital, is extremely low. Think of it this way: if, investing in public companies, the two most significant risks are 1) business specific risk, and 2) market risk, he is very successful in minimizing both.

1) He employs a basket approach of investing in equities, so he puts a very small amount of capital in each idea, thus minimizing business specific risk. Anyway, the basket of equities he chooses has always beaten the S&P500 by an appreciable margin, so he also shows some business acumen!

2) He is very effective in controlling market risk through his options strategy. I find it interesting that both Mr. Hussman and Mr. Watsa went 100% market neutral together in April/May 2010.

So, as far as I can see, since inception Mr. Hussman has trounced the S&P500 (he has also beaten the Russell2000, albeit by a smaller amount), with a strategy that allows him (and his shareholders) to run almost no risk. So, if we agree that the true measure of performance is return/risk (beware, I don’t mean return/volatility!!), than Mr. Hussman is very good indeed!

 

giofranchi

 

I have been reading Hussman weekly comments for the last 10 years very religiously. He makes a lot of sense and I think he is a pretty good investor although I am highly skeptical of his belief in assessing short to medium term risk via "market action".

 

That said, the main mistake he made is that he did not follow his own mandate. During the market lows in 2009 when his investment approach called for increasing allocation for stocks, he chickened out. He came up with the "Two data set" problem. I think this is the only mistake that he made in the management of the fund but it is a pretty big one.

 

Vinod

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I have been reading Hussman weekly comments for the last 10 years very religiously. He makes a lot of sense and I think he is a pretty good investor although I am highly skeptical of his belief in assessing short to medium term risk via "market action".

 

That said, the main mistake he made is that he did not follow his own mandate. During the market lows in 2009 when his investment approach called for increasing allocation for stocks, he chickened out. He came up with the "Two data set" problem. I think this is the only mistake that he made in the management of the fund but it is a pretty big one.

 

Vinod

 

+1

 

giofranchi

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Guest rimm_never_sleeps

jh is a top down value investor. yes that is an oxymoron. Buffett did not mention any top down value investors in "The Superinvestors of Graham and Doddsville".

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