John Hussman: Buying Near the Bottom

Excerpt from the Hussman Funds' Weekly Market Comment (12/8/08):

The ability to be comfortable with uncertainty is one of the qualities that allow good investors to function to pursue a disciplined investment approach even when the likely direction of the market is ambiguous.

The desire to create certainty out of ambiguity; to boldly take one side or another in defiance of all contrary evidence; is both tempting and foolish. Ambiguous conditions warrant moderate investment positions because the prospect for expected returns has to be tempered by the prospect for risk. Investors who accept a moderate investment exposure here should not do so in hopes of picking a bottom or catching a falling knife. They should do so in order to properly align their investment exposure with the moderate return/risk profile that characterizes market conditions here.

...

We continue to hear remarks that the current economic downturn is the worst since the Great Depression. While the prices of stocks and other financial assets have certainly suffered a great deal, by any reasonable measure of output and employment, this isn't even close to being the worst economic downturn since the Depression. Even after November's awful job report, and including all of the downward revisions, the U.S. economy would have to lose twice as many jobs as it has already lost even to be on par with the 1981-82 recession (measuring job losses as a percentage of the labor force).

While we do expect fourth-quarter GDP to come in at a loss of -4% to -6%, it is important to recognize that this is a quarterly change at an annual rate. The overall contraction in U.S. output will be somewhere about 1-1.5% in the fourth quarter. In the Great Depression, actual GDP dropped by 30%. Ben Bernanke was correct in remarks he made last week that there is an order of magnitude (10 fold) difference between the current downturn and the Great Depression. For the record, the worst overall drawdowns in GDP since the Depression not just bad quarterly growth rates were in 1954 (-2.65%), 1958 (-3.75%), 1975 (-3.10%), and 1982 (-2.87%).

...

The common knowledge among investors that things are bad and will only get worse is precisely what forms the basis of every durable market bottom. The consensus of investors tends to be wrong at peaks and troughs in the market, not because the market is diabolical and secretly wishes to frustrate the greatest number of investors, but because the consensus of optimism or fear is exactly what creates the peak or trough in the first place. For that reason, investors who are defensive at tops and constructive at bottoms will be out-of-step with what nearly everyone considers to be obvious fact.

Remember this. Just as there are a thousand reasons to buy stocks when the market is at its peak, there are a thousand reasons to avoid them at the trough. It feels dangerous, risky, foolish, and against all common sense to buy stocks low and to sell them high. This is why investors have a difficult time doing it, despite the apparent simplicity and logic of the advice.

Comments

[DavyJ:]

John,

You said: "While we do expect fourth-quarter GDP to come in at a loss of -4% to -6%, it is important to recognize that this is a quarterly change at an annual rate."

I have no idea what that means. Surely not the quarterly change multiplied by four?

What is wrong with using the year over year number?

2008 Dec 08 09:03 PM

[abbottmd:]

John-

It has become cliche to talk about pain being felt be Americans..... but has there really been that much pain? The malls seem full to me. Maybe I just expected things to look worse than they do now. Deep down, I wonder if we won't say a real bottom until we get a proverbial belt-tightening by the whole country. What we've had to date just seems like a deeper-than-usual bear market that a lot of people expect we'll just bounce back from. That double top in the long term S&P chart looks very ominous to me.

~abbottmd

2008 Dec 08 09:17 PM

[update:]

Every day of this crash has been a 'bottom' to some blogger or another.

Same ole same ole.

2008 Dec 08 11:34 PM

[jepittman:]

davyj - What I think Dr Hussman means is that the reported number should be DIVIDED by 4 to get the actual percentage decline for the quarter. Put another way, the quarterly decline is annualized by MULTIPLYING the number by four. Thus as he says a 4% to 6% fourth quarter GDP decline is actually a 1% to 1 1/2% actual GDP decline. Hope this helps.


On Dec 08 09:03 PM DavyJ wrote:

> John,
>
> You said: "While we do expect fourth-quarter GDP to come in at a
> loss of -4% to -6%, it is important to recognize that this is a quarterly
> change at an annual rate."
>
> I have no idea what that means. Surely not the quarterly change multiplied
> by four?
>
> What is wrong with using the year over year number

2008 Dec 08 11:46 PM

[jepittman:]

While its true there are no shortage of bottom callers, if you read what Dr Hussman says closely he is not 'calling bottom' so much as he is attempting to describe the conditions he believes are present at durable market bottoms. It appears he is leaving it up to the readers to decide for themselves if current conditions are similar or not.


On Dec 08 11:34 PM update wrote:

> Every day of this crash has been a 'bottom' to some blogger or another.
>
>
> Same ole same ole.

2008 Dec 08 11:56 PM

[Chris Butler:]

Responder going by the pseudonym "update":

He's not calling a bottom. He doesn't call tops and bottoms, but rather looks at market conditions on a risk/reward basis. Currently, he's seeing a moderately attractive ratio of potential return versus risk.

Frankly, if I see someone call a top or a bottom in a market, I lose at least a little respect for the author. Such calls smack of palm reading or tarot practice. The difference in Hussman's approach and that of palm readers is that the latter implies deterministic certainty. You go all in or all out. The former implies probabilities. You take measured bets based on the evidence at hand, recognizing the possibility that your analysis could end up being non-profitable.

2008 Dec 09 08:30 AM

[adan:]

very nice article, thanks!

i did want to say the rapidly growing counter-consensus that things are somewhat possibly bottoming, makes me wary we may have one or more "clunks" down, before the next meaningful, or tradeable low - just an opinion though :-)

2008 Dec 09 09:16 AM

[rjstc:]

Who Cares. If you don't worry about "Meaningful, or Tradeable", but instead focus on not trying to time a bottom. But instead figure that you can be buying at some pretty good prices that may in the short term go up or down 10-20%. But over the long term should turn out to have been really cheap (the price you pay determines the return you get). I suspect you will do quite well.


On Dec 09 09:16 AM adan wrote:

> very nice article, thanks!
>
> i did want to say the rapidly growing counter-consensus that things
> are somewhat possibly bottoming, makes me wary we may have one or
> more "clunks" down, before the next meaningful, or tradeable low
> - just an opinion though :-)

2008 Dec 09 12:33 PM

[DaveW:]

You might be right, that it is comparing apples/oranges to call current events similar to the Great Depression. But, what is different by way of quality could be similar in quantity (read: magnitude). It is documented that there are nearly $1 Quadrillion (with a Q) of unregulated derivatives outstanding. If even 1/10 of 1% of these are bad we are looking at $1 Trillion in losses, and we might not even be that lucky. It's safe to say this could be quite bad for equities. While I agree that it's buying 'near' bottoms that make a great investor, I am genuinely concerned we are not near it.

2008 Dec 09 12:44 PM