In his latest note, John Hussman talks about the ups and downs of money management, and sticking with an investment philosophy, even when that philosophy causes significant underperformance, as is the case with his funds during the rally of the last two years.
He riffs on recent comments from Jeremy Grantham, who said he didn’t mind being early to his calls:
Grantham concedes that his increased willingness to “go with the flow” was born of a “long and ignoble history of being early on market calls,” noting that GMO tends to “arrive at the winning post with good long-term results and less absolute volatility than most, but not necessarily the same clients that we started out with.” That comment reminded me of a study by Dalbar, which showed that for the 20 years ended in 2008, the Dow Jones Total Stock Market Index averaged an annual total return of 8.3%, the average equity fund returned 7.3%, but the average fund investor only achieved a return of 1.9% annually because of the tendency to chase investments at their peaks and bail out during weak periods.
As for us, we’ve certainly made our own adaptations to improve our ability to “go with the flow” with a greater frequency, even in markets that appear objectively overvalued from a long-term perspective. Still, whatever constructive opportunities there might have been in 2009 and early 2010 are now well behind us. We are close to the point where investors can ensure themselves maximum damage by shifting away from a defensive stance and buying the market, in hopes of reaching for return in an already richly valued and overextended advance.
Here’s the interesting part…
Even with our own “ignoble” miss during this cycle, Strategic Growth remains ahead of the S&P 500 since its 2007 peak, with substantially less volatility and drawdown. It’s certainly not an overall performance that we think is “representative,” particularly now having solved the infuriatingly difficult “two data sets problem” that we faced during the financial crisis. But recapturing a stronger lead will be a matter for the next cycle. Provided that our shareholders are long-term and fully understand our process, I have little concern about “growing” our number of shareholders, which is why we don’t advertise, and why we regularly do “anti-marketing” to discourage short-term investments. Still, I feel an enormous amount of personal responsibility toward our existing shareholders, and honestly, my greatest worry is that the challenges we’ve had during the recent cycle will provoke any of them to capitulate and chase the market at these levels, possibly capturing some short-term gains, but ultimately doing damage to their financial security. At least going with another risk-managed approach would be preferable. Thankfully, we haven’t seen much of either, and I’m continually grateful for your trust.
So Hussman’s believers haven’t walked away and chased the new hot fad.
When they do, that will be a major sell signal.