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Tuesday, May 3rd, 2011
his own drummer

John Hussman does a market comment every Monday, which is kind of funny when you think about it, since his focus is the long term.  His latest dispatch warns would-be shareholders:  “(D)on’t invest in the Hussman Funds if you wish to closely track market fluctuations or have an investment horizon shorter than a complete bull-bear cycle.”

Hussman is not impressed with the “overvalued, overbought, overbullish, rising-yields syndrome” that he sees, and cites some other periods where such conditions preceded a particularly weak market.  All of which is unimpressive to many that think Hussman’s bottom line is misguided:  “I emphatically believe that quantitative easing is a reckless and misguided policy, and should not be relied on as a durable basis for speculation.”  Regardless of whether they are sympathetic with his concerns or not, their approach is to try to capture near-term gains wherever they may be found and not to get too theological about the nature of things.

The investment ecosystem is nothing if not diverse, with strategies of all kinds.  When I give advice on investment process to investment organizations or individuals, I find it’s important to ask the question, “What game are you trying to play?” Only after determining what that game is can you assess the strengths and weaknesses of the strategy itself and whether the implementation is “good” or “bad.”  Obviously, time horizon and risk management techniques are key considerations.

And, in that regard, Hussman is out of step with the parade of the day, marching to his own drummer.  I have never had the chance to do detailed due diligence of his firm and have not followed his commentaries closely enough to know too much of the details of his management.  So, I’ll go with a superficial review of returns (absolute and relative, shown above) for Hussman Strategic Growth, the firm’s fund with the longest history.

Is the poor relative performance during the last two years an anomaly in an otherwise solid long-term record, a necessary condition given the discipline Hussman applies in distorted markets, or the start of a prolonged period of fighting the trend and never getting back the performance edge?  Given the conditions he cites, Hussman thinks that the market faces a major challenge over the next year.  Perhaps not coincidentally, it should be a pivotal time for his firm’s performance and his reputation as well.  (Chart:  Bloomberg terminal.)

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