One inevitable feature of long bull markets is that, toward the end of them, anyone who prematurely voices caution will be viewed and treated as a fool.
Today’s case in point: John Hussman, the manager of the Hussman Funds.
Unlike most stock-market forecasters, Hussman has correctly (if modestly prematurely) predicted the last two crashes — the one that began in 2000 and the one that began in 2007.
One might think that record would buy him some credibility.
Alas, Hussman also made a cautious and therefore incorrect call in the depths of the market crash in 2009. This call caused him to miss the turn and then underperform badly for the five years up to today. And in an industry in which 90 days is a long time, 5 years is basically forever.
So Hussman is now widely considered an incompetent moron, and the highly detailed analyses that are now prompting him to sound ever-louder warnings about an impending crash are seen as the ravings of a bitter has-been who is too obstinate to realise that his valuation model is broken and the world has forever changed.
If the market doesn’t crash — if stocks keep rising for the next several years, and the S&P 500 charges from ~2,000 all the way to ~3,000, as one august brokerage firm recently predicted it would — then Hussman will have earned some of the derision that is currently being directed his way.
If he proves correct, however, his reputation will be restored, and everyone will start saying he’s a genius again.
Such is the life of a stock forecaster.
One wise point that Hussman himself made this week, however, is that even those who successfully predict crashes rarely get the timing right — regardless of how history remembers them.
For example, everyone remembers the famous prediction the investor Roger Babson made on September 5th, 1929, on the eve of the Great Crash.
“Sooner or later a crash is coming,” Babson said. “And it may be terrific.”
Stocks tanked immediately, and, three years later, they bottomed nearly 80% below their peak.
With a prediction like that, it’s not surprising that history has lionized Babson’s forecast.
What has been forgotten, Hussman observes, is that Babson had been saying the same thing for years.
And during those years — the last, glorious years of the Great Bull Market of the 1920s — Babson looked like (and probably was considered) an idiot.
In his weekly note this week, which is as frightening as ever, Hussman includes a chart of a few of the times Babson made his crash prediction (yellow arrows). As you can see, he was “dead wrong” for several years.
For fun, Hussman also includes another assertion made at the peak of the 1920s bull market, one that has become even more emblazoned into market history. That assertion is the one made by the famous economist Irving Fisher, who observed, just after the first lurch of the crash, that “stock prices have reached what looks like a permanently high plateau.”
The point is this:
Just because everyone is telling you John Hussman is an idiot and that you can therefore safely ignore not only his crash call but, more importantly, the careful logic that he is using to make it, doesn’t mean that you should listen to them.
Hussman may, of course, be wrong: The future is unknowable.
But reputations and performance on Wall Street often have a way of mean-reverting just the way the markets do. And Hussman’s reputation and performance has now reached such and extreme that he is long overdue for a correction.
So don’t be surprised if Mr Hussman — Dr. Hussman, actually — is someday again considered unusually competent and smart.