Can They Know?

Two of the stranger (and quite possibly most dangerous) combination of financial analysts were recently spouting off, on a web program called “The Daily Ticker” on Yahoo! Finance (do I really need to punctuate a word?). Less than honest, former stock analyst, Henry Blodget and the always confusing Jeff Macke (and “confusing” is putting it mildly, some would use stronger adjectives - just watch this video) recently discussed the raging bull market of 2013 and the potential for a future equity collapse.

As per the typical money news formula, Blodget rages about the sorry state of the market and predicts the “possibility” of a near-term 50% decline in the stock market. Earnings are too low; prices are too high, and then he tries to seal his argument with the following, “… John Hussman, he projects forward, and he’s basically looking at a negative return, all in, for the next seven years for stocks.”

Well, if John Hussman says stock prices are going down, it must be true. Right? Apparently we are all supposed to know and be in awe of his incredible prognosticative skills.

John Hussman is a former finance professor who now runs some mutual funds.  he also appears to be very tight with Mr. Blodget, who has written dozens of articles about Hussman over the past five years. In a Blodget piece in late 2009, Hussman said that there was “an 80% probability that a second market plunge… will unfold during the coming year [2010]”

In January, 2011, Hussman admitted that his prediction was wrong, but it wasn’t his fault. No, it had to be the stupid investors who failed to recognize the obvious dangers that can only be recognized by someone with his brilliance. No one to be deterred, Hussman concluded his 1/10/2011 market comment by stating that the market climate for stocks continues to be “…overvalued, overbought, overbullish,…” and “…hostile to stocks.” 

Another bad year for bears followed, and what was Hussman’s position in January 2013?

More of the same. He emphatically stated (he is always emphatic) that January 2013’s market conditions “…joined 1929, 1972, 2000, 2007 and 2011 as one of the worst periods on record to accept market risk…” In other words, “No stocks for you!” How did that work out out for him.

Well, we now know that 2013 ended up being one of the best years in history to own stocks. Yet, John continues his gloomy crusade, telling his buddy Henry, that he expects negative returns for the next seven years! Wow! Excellent impersonation of a stopped clock. If he maintains his position long enough, he will eventually be right. This is all very interesting, theoretically, but how would you have been effected by his advice as an investor.

Good news. Hussman has a “stock” mutual fund we can track (it can own stocks “long” or sell stocks “short”), Hussman Strategic Growth Fund (HSGFX). Let’s assume you invested $10,000 in this fund 10 years ago. A friend placed $10,000 in Vanguard’s Total U.S. Stock Market fund (VTSMX). Even accounting for the devastation wrought on the portfolio by 2008/2009, VTSMX turned $10,000 into $21,229 (pre-tax). 

While Hussman’s fund may have done a better job of protecting you assets in the crash of 2008,  you ended up actually losing money over an entire decade as HSGFX reduced your $10,000 to $9,098. It makes me wonder why investors still have $1,3 billion parked in this fund.

It’s important to note that, despite the fact that Hussman may have accurately predicted the recession of 2008, his fund still lost value during the dramatic market decline and yet totally failed to participate in the seemingly steady rise of equities since early 2009 (see chart below)It’s important to note that, despite the fact that Hussman may have accurately predicted the recession of 2008, his fund still lost value during the dramatic market decline and yet totally failed to participate in the seemingly steady rise of equities since early 2009 (see chart below)

HSGFX VTSMX.png

While it might have been nice to avoid the 53% drop suffered by the Vanguard Total U.S. Market fund, the Hussman fund didn’t protect investors from loss, it only reduced the decline to 30%. Even, even if there was a fund that could totally protect you from the bad years, it does no good if it fails to participate in the bulk of the good ones. As the chart below illustrates; years with rising stock prices have exceeded the down years by a margin of 3 to 1.

Bull vs Bear.png

Our research, albeit far less involved than Hussman’s, points me to an apparently more effective strategy. Instead of trying to predict when stocks will rise or fall, just own a whole bunch of them for a long time and hope the future even slightly resembles the past. 

So, since Mr. Blodget thinks stocks will be falling soon, what is his advice to you, the regular investor? Here it is, straight from his mouth, “Even though I’m actually very worried, I’m not selling.” What? Didn’t he just say the market was going to decline soon? Why isn’t he selling?

“I am holding onto my own stocks,” Bodgett states, “only because I have a balanced portfolio and a long-enough investment horizon that I am comfortable with the possibility of stocks plunging, say, 50%, over the next year or two.”

It appears Blodget believes in building a diversified portfolio based on risk tolerance and then hanging on through the inevitable (and apparently unpredictable?) bad markets, and even adding more to equities as prices decline. His sensible personal position on investing begs the question, “Why bother predicting market direction?” Could it be that we keep asking for it?