John Hussman: We May Be Seeing a Phase Transition

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

Market breadth has clearly deteriorated. This was already evident in the failure of most broad-based advance-decline statistics to confirm the recent highs in the major indices. That early weakness has now been followed by a preponderance of declines over advances.

As Jim Stack of Investech Research noted near the recent highs, "The DJIA has closed higher in 5 of the past 8 trading days, but declining stocks outnumbered advancing stocks in 7 of 8 of those sessions. That type of negative breadth divergence has occurred only 15 times in 75 years -- the majority of which were in bear markets." He also noted "On Monday of last week, the DJIA hit a record high while declining stocks overwhelmed advancing stocks by a 2:1 margin." That divergence has never before occurred in market history, though again, lesser divergences have typically been characteristic of weakening markets.

Leadership has also reversed decisively. I've noted over the years that substantial market declines are often preceded by a combination of internal dispersion, where the market simultaneously registers a relatively large number of new highs and new lows among individual stocks, and a leadership reversal, where the statistics shift from a majority of new highs to a majority of new lows within a small number of trading sessions.

This is much like what happens when a substance goes through a "phase transition," for example, from a gas to a liquid or vice versa. Portions of the material begin to act distinctly, as if the particles are choosing between the two phases, and as the transition approaches its "critical point," you start to observe larger clusters as one phase takes precedence and the particles that have "made a choice" affect their neighbors. You also observe fast oscillations between order and disorder in the remaining particles. So a phase transition features internal dispersion followed by leadership reversal. My impression is that this analogy also extends to the market's tendency to experience increasing volatility at 5-10 minute intervals prior to major declines.

Comments

[Johnny Bitchdog]

Mr. Hussman -

Your analogy between the stock market and the physical world is nonsense in my opinion.

To me it demonstrates good evidence for not allowing PhD's to manage money. My experience in life is that for people that wallow in higher education pursuits it's all about sounding smart and not being smart.

There are many ways to understand the stock market and its components, and most are well covered by Economics, Modern Portfolio Theory and Behavioral Finance......behavior as in human behavior sir, not argon, not mercury, not helium.......but human behavior !

While I will acknowledge that Stanford and Michigan are fine institutions of higher learning, I must ask you sir: From which body of knowledge did you come to understand that the stock market is like a liquid turning to a gas or vice versa ?

Golly gee, it must have been a post-graduate course because I've always though the stock market was more like photosynthesis.

Now sir, after 4 years of dreadful performance in your so-called "Strategic Growth" fund.....is it not time for you to get back to basics ?

Glad I Could Help,

John

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[Richard Shaw]

Mr. Hussman,

I find physical world analogies to finance to be just as potentially insight producing as behavioral ones. Both are quite interesting.

I do feel sorry though for people who add nothing in the way of ideas to the conversation while attacking the indivduals who express ideas. They should be disregarded as noise in the system.

Thank you for the thought provoking observation. Maybe useful, maybe not, but interesting.

Richard Shaw

[Johnny Bitchdog]

The ideas are as follows:

1. Mr. Hussman's "Strategic Growth" fund has vastly underperformed any reasonable benchmark for its performance for 4 years.

2. His prospectus says that he has a way to identify positive "market action" and when such a situation is identified his investment posture is at minimum "positive" (if valuation is deemed unfavorable) or "aggressive" (if valuation is deemed unfavorable)

3. If Mr. Hussman had actually invested his shareholders money this way as claimed he would in the prospectus, it is very very difficult to believe he could have the underperformance which his investors suffered.

4. When I see folks straying from sensible talk about valuations, discount rates, economic growth...........I really do wonder whether they should be considered financial professionals.

My opinion is that Mr. Hussman had no basis to claim he could identify good "market action" and his underperformance would lend weight to my opinion.

My opinion is that Mr. Hussman has no basis for theorizing that the stock market behaviour is somehow similar to state changes of liquids, solids, and gases. I think it's just complete nonsense made up by a man with an active mind - unfortunately these types of fantasies detract from the profession of money management, something Mr. Hussman may wish to consider trying.

I have a hunch that his investors that have missed out on remarkable profits the past 4 years might wish he spends more time understanding the companies his fund owns and less on theoretical physics.

But what do I know ? Hussman may just find a way to reach into a wormhole in the universe and turn his awful fund performance around.

I will be impressed by Mr. Hussman when he admits that his "Strategic Growth" fund failed and the claims made in the prospectus would cause one to believe that his underperformance would never occur for 4 years straight in a bull market.

No need to protect this guy......... his lawyers cleverly implied that Mr. Hussman's beliefs were the guiding instinct for the fund.

You want to see a fabulous phase transition, you don't have to go Hussman's Physics 101......just read his prospectus where he tells you he has a system and then it transitions into his "beliefs"...... a phase transition boys and girls......and his investors don't even know what hit 'em. Bravo.

john

prospectus: www.hussmanfunds.com/p...

p.s.

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[mike]

John, isn't the problem that Dr. Hussman's model is long term. So long in fact, that we cannot evaluate Dr. Hussman's performance as of yet. After all, Dr. Hussman has not completed even one cycle, peak to peak. Will we ever be able to judge Dr. Hussman's performance? After all, it's entirely possible that Dr. Hussman is experiencing a period of bad luck, and yet Dr. Hussman's model could yet turn out to be the epiphany of econometric models?

[Michael Agee]

I believe johnlewing just called the top.

[Johnny Bitchdog]

Dr. Hussman has claimed in his prospectus that he has a systematic way to determine 2 variables: market action and valuation, and that he invests in 4 potential postures depending on whether the variables are favorable or unfavorable.

By it's very nature, "market action" is not long term in nature and not identified for an entire cycle but rather for the current time period based on the recent past. Thus it is very difficult to argue that Dr. Hussman should be judged over an entire cycle - this might be a good argument had Dr. Hussman claimed in his prospectus that he was guided by valuation only (as would be a very sensible investing approach).

Instead, he's made claims which I believe are bogus:

1. I do not believe Dr. Hussman has an intelligent way to determine whether market action is favorable or unfavorable.

2. If Dr. Hussman does have some way, whether well-reasoned or misguided, it is quite clear that he has failed miserably over the past 4 years.

The exact cause of Dr. Hussman's failure in this fund could theoretically be caused simply by horrendous stock picking by Hussman Econometrics, but it would have to have been so bad as to be negligent given the positive returns for equities the past 4 years.

Keep in mind that Dr. Hussman claimed that his investment posture would be as follows:

1. Market Action Favorable / Valuation Favorable = Aggressive

2. Market Action Favorable / Valuation UnFavorable = Positive

3. Market Action UnFavorable / Valuation Favorable = Moderate

4. Market Action UnFavorable / Valuation UnFavorable = Hedged


Note that if Market Action is favorable, Dr. Hussman claims to be either Aggressive or Positive (depending on the valuation variable). For the purposes of this analysis assume that he considers Valuation as unfavorable (a fair assumption I think), so he would have been invested as Positive during favorable market action periods.

Clearly his underperformance strongly suggests he was hedged, though and this is contrary to his prospectus claims as long as he properly identified the market action the past several years as favorable.

In the end, and without detailed data on his holdings and hedging strategies, here's my bottom line:

1. The underperformance is either caused by failing to understand that the market action was "favorable" or by horrendous stock picking by Hussman Econometrics, or perhaps a combination of the two.

2. Most importantly, even if Dr. Hussman had wrongly concluded that market action was favorable and valuation was unfavorable and been in his "hedged" posture, I do not believe his returns are commensurate with a reasonable hedged position.

I don't have the figures in front of me but I believe the general equity returns were over 100% while his returns were less than 20% (not even the compounded risk-free rate for chrissake).

As an investor reading his prospectus I would not expect such dramatic underperformance under any circumstance he describes including "hedged".

Therefore I believe Dr. Hussman failed his investors, and may even be reasonably accused of professional incompetence with regard to the actions taken in the "Strategic Growth" fund.

What is annoying about this is the lawyerly crafting in the prospectus that implies he has a system as described in the prospectus and he would invest accordingly, but ultimately the prospectus uses clear terminology that fund will be invested according to "beliefs" of Dr. Hussman's.

Suck the clients in with a phony description of your ability to identify favorable markets and valuations based on a system...............b... when it comes down to legal action make sure you cover yourself by stating that you are investing based on your beliefs - it's very difficult to challenge Dr. Hussman's beliefs, but I'll bet I could slice and dice his system for determining favorable market action to pieces, not to mention whether he even has one or used it systematically.

I would guess there wasn't much of a system in place at Hussman's operation......save for very effective marketing systems.

john.

lastly, i do believe the past 4 years underperformance are quite adequate to conclude beyond any reasonable doubt that Dr. Hussman has failed to perform the mandate described in his prospectus. One would have to conclude that he is a non-value-added manager with respect to his investors funds placed in the "Strategic Growth" fund.

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[Johnny Bitchdog]

By the way, a couple of further comments on your ideas:

1. The idea that you need a full cycle to determine whether a money manager added value is pretty stupid unless the money manager is making claims related to expected average returns over a full cycle.

The problem, of course, is that poor misguided investors end up paying someone 10 - 20 million dollars over the cycle to determine whether the guy adds value - that's pretty stupid.

There is really nothing in Hussman's prospectus which would support this idea, though many money manager would like to defer judgement day for many many cycles.....and many get away with it ! In fact, the mere fact that Hussman claims to have a system for determining the favorability of "market action" is quite enough evidence to determine that he should be judged regularly.

5 years of underperformance and barely getting Treasury returns should be a rather clear indication that Husmman's Strategic Growth fund failed to perform as advertised. Keep in mind this is an equity fund and he claims it would typically be fully invested in equities selected by Hussman Econometrics.

I can guarantee you that a statistical analysis of this funds performance would conclude with very little doubt that it failed to add value, and that it is unlikely that it's failures were due to chance. Very likely that it's failures were due to pilot error.

2. With respect to the idea that bad luck is what has caused this funds underperformance disaster for investors, it's much more likely that the single year or so of good performance was due to luck and the 5 years of underperformance was due to lack of skill or a bad system.

My guess is that the only true system Hussman uses to determine "market action" is his own failed hunches. That's a shame if true because any idiot could have watched a rising market for 5 years and determined that the "market action" was favorable.

I know I am being pretty harsh, but I think it's well warranted based on the underperformance. Keep in mind Hussman won't give his undeserved salary and bonuses back to investors and even when sensible redemptions close it down, he will be walking away with more than enough to live very comfortably without working.

If his investors were only so lucky.

john.

[Johnny Bitchdog]

Truly my last word on the topic just to be more fair to this underperforming money manager:

If the market were to truly crash, let's say 30% from the top over a concentrated period (6 months or less), that would provide some evidence that Hussman's wrongness was only misguided as to timing, but his valuation stance (unfavorable as I understand his words) was reasonable and correct.

Unfortunately for Mr. Hussman, he clearly implies, if not states, that he is able to determine the market action characteristic, and presumably this is why investors are willing to pay for his "expertise". This is a highly dubious claim in light of his performance.

A major crash in a very, very concentrated period of time would provide him some measure of credibility, but even then we would have to wait and see what his returns look like through that period.

I highly doubt the market will come to his rescue before rational investors determine he's not adding value, but I also recognize there is some very small probability of a major crash that makes his perspective look better, as long as he can prove he generated good returns during that period.

Even during a crash investors might find out that Mr. Hussman performs alot like Joe Six Pack (for lack of a better term): selling when scared, buying when confident and generally underperforming a diversified buy and hold strategy.

The End. john.

And, of course, Hussman will never defend his record in written form because the same clever lawyers who crafted his prospectus to dodge his system of determining "market action" in favor of his "beliefs" will rightly tell him that there is no benefit and all risk to doing so.

Fortunately the internet provides an outlet to call B.S. on folks like Hussman that underperform but who are seldom exposed fully as having done so.

Happy to be the man to do the job.

Lastly, all I have written is based on my "beliefs" Mr. Husmman.............If that is unfair, then it is certainly no more unfair than your fund prospectus......and probably a lot more fair if you ask me.

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[MDCigan]

"The exact cause of Dr. Hussman's failure in this fund could theoretically be caused simply by *************horrendou... stock picking***************... by Hussman Econometrics, but it would have to have been so bad as to be negligent given the positive returns for equities the past 4 years."

Not sure why I am responding. There is a biblical proverb about not arguing with fools. I guess it is just annoying to see you keep repeating the same erroneous assertion.

I'm not sure if you are just too lazy or too stupid to verify what you are saying above (on the stock-picking). In the annual reports for the fund, Hussman breaks out separately the performance of just the individual stock-picks from overall fund performance. The individual stock-picks have *OUTPERFORMED* the market every single year since inception except 2006. The underperformance of the fund is entirely due to being fully-hedged pretty much 100% of the time over the past 3 years. Therefore, the return of the fund is going to be the difference between the stock-picks and the overall market plus the interest earned on the hedges.

You certainly are an interesting fellow. You seem to be on some sort of mission with your plethora of replies to numerous bloggers. You do seem to be a self-proclaimed expert on the market, with the correct stance on "market action" being obvious to you. So help me out, how would you be positioned here. Are you bullish, neutral, bearish? What is your forecast for the next 12 months? Would you be 100% unhedged here, or fully hedged? I suspect you will not give clear answers to these questions, as you have know idea yourself. I think you know how to throw stones, but have no idea how to build the house yourself.

[Johnny Bitchdog]

Sir, while I am sure you are a genius in your own mind, the term "fully-hedged&quo... has no specific meaning.

Mr. Hussman's prospectus claims he is only "hedged" if val uation and market action are unfavorable. If it is true that he has been "hedged" for the past 3 years, it is a fair conclusion that Mr. Hussman's system of determining "market action" favorability is a failure. As I've said before, I don't think he uses a system as implied by his prospectus but rather is like any old Joe using hunches. I presume he does better with the valuation variable which lends itself better to quantifying analyis.

Mr. Hussman's fund claims to be an equity growth fund which would typically be fully invested in equities selected by Hussman Econometrics. A three year period (a bull market no less) of being fully hedged (whatever that means) seems rather inconsistent with this statement.

If Mr. Hussman were fully-hedged as you say, a reasonable interpretation would be that he earns the risk-free rate. Since he did earn returns slightly higher than the risk-free rate, it would appear that he is not fully hedged as you say, but again fully hedged may mean something different.

If Mr. Hussman had rather been market neutral (another interpretation of fully hedged) we would see whether his stock picking abilities produced good returns, and they have not.

This is not a childish argument (as in "what do you think the stock market is going to do" ?) but rather an analysis of whether Mr. Hussman succeed in following his mandate as described in his prospectus.

My interpretation is this and you can take it for what it is worth:

1. Mr. Hussman's claim in his prospectus of being able to differentiate the favorability/unfavorab... of "market action" is highly dubious. This is generally a dubious claim and his performance over the past 5 years should be adequate evidence that this claim is bogus.

2. Had Mr. Hussman correctly identified the past 4 years as "favorable" market action (correct in retrospect, difficult to know in advance though his prospectus claimed he had a way) Mr. Hussman would have been in a "positive" or "aggressive" market posture and would be expected to generate returns better than or equal to general equity returns. In reality the returns were atrocious for a "strategic growth" fund in a bull market.

It is not unfair to throw stones at underperforming money managers that make dubious claims, underperform, and walk away with millions. I have made no such claims and generally believe most people should stay away from expensive and dubious active money managers. Most of these are marketing operations more than they are money management operations.

Regards and take my harsh analysis for whatever you think its worth.

john.

[Johnny Bitchdog]

finance.yahoo.com/char...=^dji;range=5y;indicat...

take a look at the 5-year chart of the market, and ponder how Mr. Hussman's "system" for determining whether "market action" is favorable or unfavorable.

Just remember, he's running an equity growth fund which he claims would be typically fully invested in equities.

And even in the worst conditions when both "market action" and "valuation" are unfavorable would he be "hedged". Not "fully hedged", "hedged".

For chrissake, if he's going to generate t-bill returns for 3 years there's no reason to pay his active management fee......better to just return investors money.

I suppose that should be the end result anyway for investors that understand the underperformance.

john.

[Paul S C]

Mr. Lewing,

Up until this point I have filtered through your posts and tried, though all good sense tells me I am wasting my time, to find some semblance of rationality. Call it common decency if you like. I now have a question for you: can you agree you have had a fair opportunity to voice your opinion?

No-one is arguing that strategic Growth’s pefrormance has been poor over the lastfew years. What you are failing to grasp is that the fund’s shareholders are well aware of this fact and have come to terms with Hussman’s ‘fully hedged’ stance as it was commuicated to them on a WEEKLY BASIS! They also realize that Hussman’s gauge of ‘favorable market action’ did not work for the last few years of the protracted bull market. Nothing you write is news!

Who are your ramblings directed at? – on the one hand, you have the choir – and on the other are those who now suspect lunacy and just rolltheir mouse wheels dwn a few times when they see your name (although even that has become tiresome). Sir, I am sorry to say, that as of today I am one of the latter.

Please, I implore you,for the sake of civility and everyone’s time, move on. Why not focus your wealth of time and effort somewher else; like helping people with teaser-rate mortgages resetting in mid-2008 figure out how they are going to refinance? Anything but this!

[Johnny Bitchdog]

If people are paying Hussman a fee to be fully hedged they are very foolish people (financially speaking anyway).

I doubt most of Hussman's fund "investors" have any clue about what fully-hedged means. If it truly means he is hedged such that no risk is being taken and the risk-free rate is the benchmark, then Hussman has one of the greatest scams going:

Pay me x % of your money so I can put you in a risk-free position.

Now, that's a brilliant scam.

If Hussman is such a genius and a transparent genius apparently according to others.....folks should get the hell out of his fund when he is "fully hedged" - you don't pay a manager of an equity growth fund to deliver the risk-free rate, bonehead.

If I thought you were speaking for all the people you claim to be speaking for I'd take you more seriously......but rather I think you just don't like what I am writing - a pretty good resemblance of the truth, if not the naked truth, my man !

Make that the unfiltered, naked truth.

Tiresomely Yours,

John

[Paul S C]

Please refer to a prior post of mine; since inception, Hussman has added material value over and above the rfr (his Sharpe is stellar over that period). 4 yrs, in the big scheme of things, is not long enough for me to lose faith in the man. Let's take another look at his performance at the of 2007 and then maybe in a year after that. I can wait. It's down in my calendar.
Until then, goodbye John

[Johnny Bitchdog]

Paul - Instead of making broad statements which are quite possibly false, why don't you give these numbers.

Forgive me if I am skeptical of "he's added material value" and he has a stellar sharpe ratio.

Frankly I think you are completely full of it.

The only way he can have a stellar Sharpe Ratio is if all underperforming growth fund managers have stellar sharpe ratio's. I doubt it but if you can produce the actual figures rather than your fantasies I am willing to look at it.

And please do not get the sharpe ratios from Hussman.....do the calculation on a monthly basis.

But even if your unlikely fantasies are backed up with numbers, the main point is that Mr. Hussman has a mandate described in his prospectus.

It is quite clear in the mandate that this is an equity growth fund which, though periodically will be hedged, is typically fully invested.

If I had asked you in advance to understand his mandate and asked how it would perform in a gently rising equity growth market over 4 years, what would you expect in the returns ?

Answer: At or above the equity market rate would be the answer (go read the prospectus and do this exercise).

If your answer is something else, then you are not looking for an equity growth fund. If your answer is that Hussman's returns the last 5 years are acceptable, then you are delusional. The returns stink to high heaven and are inconsistent with the mandate.

Hey, listen, if the guy screws up with a hedge for a year or so......fine, a professional made a mistake.

But 3, 4, 5 years of dramatic underperformance - that's not a mistake, it's borderline fraud. Again, read the prospectus and figure out whether Hussman succeeded. Don't take my word, read the prospectus.

I will be waiting for your Sharpe ratios........and should the Sharpe ratio compare favorably to proper comparisons (equity growth managers) over the last 4 years, Sharpe will be turning over in his grave (is that guy dead ?) and the measure will no longer be useful.

So Paul, when we gonna get the Sharpe ratios ?

John.

[Johnny Bitchdog]

Another thought on Hussman's returns:

Looks like the returns are this:

2.84 % 1yr
4.55 % 3 yr
6.46 % 5 yr

To me that looks like 3 years at or below the risk-free-rate. the 5 yr is above a couple of percent and I will agree this is material, though unacceptable performance for a Strategic Growth fund which claims to be typically fully invested, and further has a system to differentiate "market action" favorability.

My figures remove an expense ratio of 1% though I think it's higher than that, and I am just assuming that the returns Hussman presents at his website (3.84, 5.55, 7.46) are before taking out expenses, though there is no clear information to that effect. Usually it's best to distrust money managers on this kind of thing, as it is often used to deceive investors into believing their returns aren't as bad as they really are.

If the presented returns are actually net returns to investors after the expense ratio, I will be impressed.

If they are not, it is just one more reason to distrust Mr. Hussman's Strategic Growth fund.

With respect to the Sharpe ratio, it is quite obvious that the past 1, 3, and 5 year figure would not be stellar, though the 5 year might just be bad rather than atrocious. Also, the Sortino ratio would probably be a better measure anyway so as not to penalize equity growth managers for upward volatility.

If you go back to inception, it looks substantially better, but you have to keep in mind that the early years were a very abnormal market deflating from the bubble.

But in the end, in order to evaluate this fund properly you have to find a reasonable benchmark for an equity growth fund which occasionally hedges when the manager believes valuation and market action are both unfavorable.

The S&amp;P is a reasonable benchmark (I can't think of any better) though you could make an argument that the benchmark should be even higher than the S&amp;P.

On that fair measure, Hussman's fund has failed on a 1 year, 3 year, and 5 year basis - really it's as simple as that.

The idea that it's unfair to judge the guy on 5 years is pretty silly, given the very dramatic underperformance. Keep in mind we are not talking about near benchmark performance, we are talking about 20% to 120% (roughly) over the past 5 years.

Put 100K into a diversified index fund for 5 years - receive 220K back
Put 100K into Hussman's Strategic Growth fund - receive 120K back

Now most active managers do not outperform index fund over serious periods of time, but this underperformance is so bad as to be nearly criminal.

Is it possible that Hussman's approach will be vindicated ?

Extremely unlikely. I think it would take a very, very dramatic decline in a very, very short period of time to vindicate him. And even then it would not be full vindication as measured against his prospectus mandate:

There will never be any way to realistically dispute that Hussman's claim in his prospectus to be able to identify positive "market action" is simply bogus or he failed to implement his claimed system.

Remember that the only time he is supposed to be hedged is when "market action" and "valuation" are unfavorable. So the only way to explain his "fully hedged" approach is if he wrongly determined that the "market action" over the past 4 years was unfavorable. Otherwise he did not follow his prospectus which is a legal mandate.

So, feel free to trust him based on your instinct or friendship or whatever it is, but it is clear to me that a substantial failure occurred which cannot be explained away if you are willing to hold him responsible to the prospectus mandate and an equity growth benchmark.

regards,

john.

[gembree]

The numbers already include the impact of fees, as can be verified by checking the individual annual reports (Hussman is pretty on-the-ball regarding governance, although I agree that unfortunately you cannot just assume fees are subtracted these days).

I'm not really sure why you're so concerned with the details of his prospectus mandate. I think you are overly concerned with the box, which is a helpful visual aid but only generally true. It's not a simple binary sum, but an analysis. He has stated continually that he feels the current overvaluation outweighs the mildly to decently favorable market action over the last few years.

I guess my question is, why do you feel so strongly that 4 or 5 years is a better frame of reference than 6 years? Even if you include just that one extra year, 2002, and give him no credit for 2000 or 2001 performance, HSGFX destroys the S&amp;P. Do you really think that having one year out of six be a bear year is so unusual and abnormal?

[Paul S C]

Mr. Lewing, you should learn to pick your fights. You asked for numbers - allow me to school you:

Hussman Strategic Growth’s Sharpe ratio since inception is either 1.15 (arithmetic) or 1.12 (geometric) depending on which method you prefer. This is taking the longest period where monthly returns (as you stipulated) are available, namely 8/1/2000 (roughly one week after inception) to 7/31/2007.

I’ll be honest; I was sort-of winging it earlier with the word “stellar”. I knew the number was good simply because I knew the fund’s return over the same period was good (11.91%; which, I might add represents roughly 900 basis points of annual excess return over the S&amp;P500). I also knew the annualized monthly standard deviation over the same period (7.6%) would help put his returns in perspective. However, thanks to your brazen ignorance, I can now be more specific. Now read carefully, I don’t want you to miss anything!

I looked at every single domestic Large Cap open-end mutual fund I could get my hands on (I came up with roughly 1,500) and compared the 7-Year Sharpe ratios on all of them. Guess who had the highest Sharpe ratio? If you guessed Hussman Strategic Growth, you would be correct! If I add every single domestic Mid Cap open-end fund I can find (roughly 650), as Strategic Growth also holds some mid caps, I only get 2 that have a higher Sharpe ratio: Fairholme (FAIRX) and JPMorgan Mid Cap Value Inst (FLMVX).

Allow me to repeat the key point above:
Out of an unscreened universe of 2,165 domestic Large and Mid cap mutual funds, 1,331 of which have a 7-year track record, Hussman Strategic Growth has the 3rd highest 7-year (monthly since inception) Sharpe ratio.

I’m sure that’s not the response you were hoping for; it’s a little more specific than my previous comment; however, given that I didn’t have the numbers at my finger tips, the word “stellar” was pretty apt.

Now I will be the first to say that comparing Hussman Strategic Growth to these long-only funds is not appropriate. But, I am not here to write a research report. I merely wanted to back up the word “Stellar”.

If you question the above; which no doubt you will, I encourage you to find me a domestic large or mid cap open-end fund with a better 7-year Sharpe ratio. I can help you with the calculations if you struggle.

You probably feel like you just walked into a freight train, don’t you Mr. Lewing? Well, I have some more news that might make you think twice before being unnecessarily rude in the future and hopefully temper your ignorance – wait for it – today alone, Hussman added 322 basis points of alpha.

[Johnny Bitchdog]

If true that the home page presentation includes impact of fees, that is good......and Hussman's folks are only guilty of foolishly not making that clear in the presentation. The fact that the expense figures were below subtly suggested that the return figures were gross of fees.

As far as my concerns go, it is certainly not limited to the 4 sectored investment posture box, which may be simplified for presentation purposes.

The concerns succinctly are this:

1. It is marketed as a growth equity fund which will occasionally be hedged, but will typically be fully invested in equities chosen by Hussman Econometrics.

2. Occasional hedging should not result in the dramatic underperformance that has been seen in the past 5 years. It appears, rather, that Mr. Hussman was not really running a growth equity fund but rather some kind of instrument seeking a dramatically different risk exposure. Whatever that risk exposure was, it would not appear to me to be consistent with an equity growth fund which is occasionally hedged.

Short or medium periods of dramatic hedging might be appropriate but locking investors into a near risk-free rate of return for a multi year period in an equity growth fund does not appear to be reasonable or consistent with the mandate in my opinion. There are many ways to get low risk investments for multi year periods, and paying Mr. Hussman an active management fee over this duration seems to be an unwise financial decision.

3. The prospectus implies that Mr. Hussman uses indicators to determine whether "market action" is favorable or unfavorable and further implies that he understands from history that these indicators are valid. To me, this is just bogus marketing crap. I have no problem believing that Mr. Hussman has intelligent and time-tested ways of assessing "valuation", but this crap about "market action" is just that - CRAP.

In fact, I would love to have Mr. Hussman to explain the following:

- what was your system of determining the "market action" variable you claim to use in your investment decision making process ?

- did it work as expected the past 5 years ?

- if not, can you help me understand what went wrong ?

These are the kinds of things Mr. Hussman should be explaining to investors, though I do admit it is very entertaining to hear that the market is going from a liquid state to a gaseous state (or vice-versa) before our very eyes.

As to your last question, Mr. Hussman has underperformed any reasonable benchmark for and equity growth fund for 5 years or so. This is not a case of 1 year of bad performance. And while he may or may not deserve credit for the trouncing in his first year or so, I would just say that the great weight of evidence including the last 5 years highly suggest that he does not add value and may not have actually been running the equity growth fund with occasional hedging that his prospectus describes.

From a statistical perspective it is also fair to give lower weight to dramatic market events like the internet bubble, and his early year seemed to have benefitted greatly from the dramatic unwinding of internet stocks (all while many value stocks did decently). It is much more likely that this period is the period you want to ignore or weight lower than any of the recent 5 years though there is clearly room for debate on that.

If you want to be charitable you might conclude simply that Hussman foolishly believed he had some way of assessing "market action" and ended up being very, very wrong and investors paid for his wrongness. I think it's much worse than that, though, and would say that Mr. Hussman arrogantly believed he had such skills to determine "market action" and even in the face of nicely rising equity growth stocks he refused to believe the "market action" was good........and his investors paid dearly.

You can get into all sorts of nitpicking about the intersection between "valuation" and "market action" and the weight of the evidence, but in the end his investors paid dearly for his approach to investment analysis, and if he had simply bought from the universe of stocks which were reasonably valued, his investors would have cleaned up and would have more than doubled their wealth the past 5 years.

And this is really the lesson in simplicity: buy stocks that are reasonably or attractively valued......go ahead and study chemistry, physics, and learn to play the guitar while they rise over time, but spare us the analogies........becau... it is all well covered in the time value of money, accounting, behavioural finance, economics, statistics, and mathematics.

Even if it does, I don't think there's a chance that he can make up the ground already lost by not following the simple mandate of running a growth equity fund.

John.

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[Mary Ellen Stevens]

Would you gentlemen mind taking this tiresome, overdone exchange with it harsh tones and insult offline? There are plenty of chat rooms where personal issues are exchanged, but this is supposed to be a forum of more general interest and hopefully conducted in a more civil manner.

At best, this is a boring thread. At worst, it is a slow motion written brawl.

Please take it somewhere else.

[Johnny Bitchdog]

Mary - Don't read things you find tiresome, and don't tell other people what to do.

John

[<em>Edited for offensive content</em>]

[peterSchmelling]

John,

You need an anger management course, and probably a series of visits to a psychiatrist.

[Johnny Bitchdog]

peter- pointing out the foibles of investing morons and the phony "money managers" they revere is perfectly therapeutic......thoug... perhaps not as good as a bottle of scotch.

My unstable mental health really should not be the issue

Regards, John.

[<em>Edited for offensive content</em>]

[Pauli DiNapoli]

Hey John!

What is it? Why you stink up the place? Be nice. Talk a walk. Eat some food. Drink some wine.

[peterSchmelling]

John,

You sure love to hear yourself talk. And apparently all the rest of the world is populated by fools, except you of course.

This is not your only hostile posting. You have graced other writers with your condescending and insulting comments.

So if we are all so stupid, why are you wasting your obviously superior self communicating with us.

I guess you will just keep enjoying yourself while you lower the level of the dialog on this site with every comment you post.

My only reason for spending time on you was the now lost hope that you might stand back and see how damaging rather than helpful your approach has been.

You don't want dialog. You just want to make yourself feel better by making others feel bad. Maybe you'll just burn yourself out and go away. So good-bye and I hope you get well.

[Johnny Bitchdog]

Sir -

Please don't be offended by my opinion that Hussman's Strategic Growth fund may have failed to follow it's mandate, and certainly failed to come close to any reasonable benchmark which might be chosen.

It's rather funny that so many people have opinions about personalities and people they will never meet, yet seem to have no opinion on the topics at hand:

For example, Is the stock market like a gas going to a liquid ?

I do not believe I have lowered the dialog. In fact, I think folks that are trying to suppress opinions or personalities but who have nothing to say about the investment related topics are bringing down the dialog........the funny thing is how testy people get when they hear things they don't like.

Furthermore, on the internet it's best to take anybody's opinion with a grain of salt, as I am sure plenty of Hussman cronies might argue his case not from principle but from cronyism.

If Hussman were truly a transparent manager and looking out for the interests of his suffering investors, he would answer the following simple questions:

- what was your system of determining the "market action" variable you claim to use in your investment decision making process ?

- did it work as expected the past 5 years ?

- if not, can you help me understand what went wrong ?

These are valid and important questions for investors to determine whether he adds value, and I am of the opinion that his essays are self-serving.

But hey, if his suffering investors would rather know that the market is like a gas changing states to a liquid instead of why he has underperformed his benchmarks, that's up to them (you ?).

It is quite possible that my straight-forward opinion may not be conducive to snapping Hussman out of his Physics essays.......

Would you mind asking him the important questions and reporting back ?

John.

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[Pauli DiNapoli]

You talk nice now. Maybe people talk nice with you
I watch and listen, mas not so good at questions
The market she is confused, Mr. Hussman I don't know him
he can talk and you can buy something else
Mas, buy some stocks now, little more latter, you make money
don't be afraid
buy cheap

[Paul S C]

I’ll repeat part of my previous post for Mr. Lewing; he’s either pretending he didn’t read it or he is still struggling trying to verify the numbers.

Out of the entire Morningstar domestic large cap (that’s value, growth, and blend) mutual fund universe - roughly 1,500 funds - Hussman Strategic Growth has the HIGHEST 7-year (monthly since inception) Sharpe ratio. Throwing all of the domestic mid cap funds – roughly 650 – into the analysis, there are only 2 funds that have a higher Sharpe. So out of an impressive 2,165 mutual funds, 1,331 of which have a 7-year track record, Hussman Strategic Growth has the 3rd highest Sharpe ratio. Mr. Lewing, please go back and read that again very slowly – I don’t mind if it takes you a while to comprehend. You see, unlike you, I am patient.

That’s reason enough for me (and I suspect a few other people out there) to hang on to this fund. And, all it took was one, brief, concise, paragraph.

Throw in the potential the fund has to add over 320 basis points of alpha in a single day (over the S&amp;P 500) - when you need it most – like on Friday (which is exactly what it did) and I would say it is time for Mr. Lewing to sell his dribble somewhere else.