John Hussman: Unfinished Cycle or New Economy?

Excerpt from fund manager John Hussman's weekly essay on the U.S. market:

Shouldn't we change our investment approach to get "in synch" with the recently rising trend of the market? Though it would be preferable for us to have captured a greater portion of market gains lately, particularly during the past 10 months, the fact is that giving greater weight -- in hindsight -- to those variables that could have kept us more aggressive in this specific instance would also have produced lower returns and deeper losses on a longer historical basis.

The acceptable changes to an investment model or strategy are not simply those that would have performed better in the most recent instance. They also must have performed well in split samples over a wide range of history, and preferably also in a testing sample that was not used to create the strategy in the first place. One cannot simply say after the fact, "well, this indicator is better because it would have kept you in lately" if the indicator in fact underperforms your existing strategy when tested over time. That's my difficulty not only with the Fed Model, but with many alternative investment approaches...

Speculative investors regularly create "new era" arguments and valuation metrics to justify their speculation. But you don't change your investment strategy based on half of a market cycle (or less). You can certainly refine it gradually based on new evidence. Still, if your strategy has performed well historically, and also over the most recent full cycle to-date, it is not at all clear that it should be modified. Certainly not at bull market highs, and certainly not for "new era" arguments saying that all of history has magically become irrelevant.

Comments

[Richie]

"Still, if your strategy has performed well historically, and also over the most recent full cycle to-date, it is not at all clear that it should be modified."

John, you again twist the facts. The reality is that your "strategy" has never work in any type of market environment or cycle. A value approach works sometimes as does growth and even momentum. But your unique approach of looking at macro trends and trying to extrapolate them to apply to individual companies has never worked. NEITHER YOU NOR ANYONE ELSE HAS EVER BEEN SUCCESSFUL AT TIMING THE MARKET, and much of what you try to do is tantamount to just that.

And as to "modifying a successful strategy" Jim Simonds, the math genious behind Renaissance Technologies totally disagrees. As the acknowledged (long term) top hedge fund manager in the US he says his BLACK BOX model must regularly be tweaked and up-dated, otherwise, it starts to underperform.

[piedra.j]

Saying that nobody has ever been succesuful is like saying that nobody outperforms the market -- We all know that is not true. At the core here is whether you believe that markets are efficient -- no markets are not efficient. Otherwise a Warren Buffet or Peter Lycnh would not have existed.

John does not twist the facts, actually I think he just lays them there and you can take your own conclusion. Which in my mind are very clear.

It seems to me that like in the late 90s many want to believe in Santa and a new era... ...do it at your own peril. The fact that some stupid continues to be stupid, does not make it smart. Gravity force does not dissapear when you see a rocket going up...