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Tom Armistead
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I am a retired accountant, having spent the early years of my career in the insurance industry and the later part in the field of accounting. My insurance experience has given me the willingness to accept investment risk if I feel the return justifies it; also, an interest in applying risk... More
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Tom Armistead's Instablog
  • A Note To John Hussman 27 comments
    Feb 7, 2014 7:31 AM | about stocks: SPY

    John, it's not going to happen.

    The reason is, it already happened, and you missed the boat. You stood there pontificating and procrastinating as the gravy train pulled out of the station and never looked back.

    When I was a kid, I went to this very special school. All the other kids were fairly bright, but kind of crazy. Barney was about my age, took an interest in aerospace and aviation, and had this escape fantasy. He was going to build an airplane, or maybe it was a glider, out of materials at hand, and fly away.

    He labored for days, constructing this contraption. We looked at it, and all we saw was the rough outline of a glider, formed from dead branches lashed together with bits of twine. We kept telling him, it's never going to fly. He kept insisting it would. He saw a sleek jet, shining in the sky as it carried him off to freedom.

    Finally somebody (not me) did the inevitable: they destroyed Barney's airplane, in the middle of the night. He found it lying in a heap, and never attempted to rebuild it.

    John, I hate to say this, but the S&P 500 is not going to go down to 400 so you can get a guaranteed 20% return for eternity. It doesn't work that way. You can pound on the pulpit, and cite Shiller statistics going back to 1871, chapter and verse, but you are not going to be rescued from irrelevance by this improbable occurrence.

    You can fiddle with dead statistics and data-mining until the cows come home, and prophesy until you are blue in the face, but the markets aren't going to listen. And you will never be wafted into that sweet future you envision, riding the sleek jet you imagine, looking down from 30 thousand feet, and saying "I told you so."

    The best thing for you to do John would be to go out and play with the other kids, as crazy as they are, and learn the rules of the game, as crazy as it is.

    Disclosure: I am long SPY.

    Stocks: SPY
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Comments (20)
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  • JYucca
    , contributor
    Comments (241) | Send Message
     
    Very amusing, and very nicely written. I think you are right about people like Hussman -- some rigid thinking (focusing on what "should" be rather than endeavoring to learn what is), curmudgeonly righteousness (the market has sinned and must be punished), and some wishful thinking, like the boy with his airplane of sticks. By the way, do you know what became of the kid? I'm long SPY, too.
    7 Feb 2014, 08:00 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (6198) | Send Message
     
    Author’s reply » I was able to track Barney down over the internet. I haven't communicated with him, but I can tell you, he lives in a house that looks like a flying saucer. He has written two books, which he self-published. He's had some disputes with his neighbors, who played loud music that upset his concentration. The whole thing was resolved very well: he found a way to send loud screeching noises into the speakers on their equipment, some kind of radio phenomenon he exploited, which got his name in the paper, and ended the loud parties.
    7 Feb 2014, 08:07 AM Reply Like
  • JYucca
    , contributor
    Comments (241) | Send Message
     
    Love the stories! Made my day.
    7 Feb 2014, 08:15 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (6198) | Send Message
     
    Author’s reply » Thanks, I try to get away from the dry analysis from time to time, have a laugh and poke a little fun at myself and others.
    7 Feb 2014, 08:22 AM Reply Like
  • expatsp
    , contributor
    Comments (289) | Send Message
     
    +1 as usual.
    7 Feb 2014, 08:06 AM Reply Like
  • The_Hammer
    , contributor
    Comments (5027) | Send Message
     
    the craziness appears to be ending in bitcoin as we will inevitably have a significant correction in equities.
    7 Feb 2014, 08:06 AM Reply Like
  • pemdas1
    , contributor
    Comments (262) | Send Message
     
    Amusing, entertaining and very well written!
    7 Feb 2014, 08:51 AM Reply Like
  • Robin Heiderscheit
    , contributor
    Comments (3131) | Send Message
     
    OMG, literally my two favorite writers Hussman and Armistead, squaring off (ummm except I guess Hussman never responds to stuff like this).

     

    Tom I know you meant more to be amusing than rigorous, but Hussman would actually move ahead of the market for the twenty years or so he has a public track record with a pullback of 35% or so, i.e. to around 1200 on the S&P 500, not the 400 strawman you set up.

     

    Do you really believe we will never again have a 30-50% decline or do you concede that we will again, some day, have a major bear market? If you think we will have another major bear I guess your premise is that it will start from significantly higher levels, such that Hussman would NOT be vindicated?

     

    Finally, if Hussman were really just about money he would do exactly what you suggest, i.e., join the other boys on the playground, because he is actually a very good stock picker. (I daresay many of his approaches are similar to yours in that regard.) Of course we all know about his very non-economic motivations with his son's situation and all.

     

    Anyway, I wish I could get you guys on the same Twitter feed together!
    7 Feb 2014, 10:35 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (6198) | Send Message
     
    Author’s reply » Hi Robin, thanks I guess I'm now in the big leagues if you can compare me to Hussman as a writer...
    I can get to the 1,200 needed to vindicate Hussman, first we meander down to 1,600 which I think is a midpoint value, then something happens somewhere. So 35% off of 1,600 is 1,040, and all he has to do then is put his client's money on the table.
    At that point I would call him up and offer him my services, I know how to blast off out of a hole, I've done it several times.
    7 Feb 2014, 01:09 PM Reply Like
  • dancing diva
    , contributor
    Comments (2718) | Send Message
     
    Tom - thanks for a good laugh! I get really frustrated whenever anyone cites him. I even went as far as hunting for his email address to tell him why he was wrong a couple years ago. It's not published - even on his website - obviously he'd be bombarded.
    7 Feb 2014, 04:46 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6198) | Send Message
     
    Author’s reply » I went to the website today, I was going to send him a copy of my note, but like you say, no email address. Oh well.
    7 Feb 2014, 05:22 PM Reply Like
  • Mark Gilliland
    , contributor
    Comments (94) | Send Message
     
    Excellent post Tom, funny and you make a great point.
    7 Feb 2014, 05:25 PM Reply Like
  • larryl9
    , contributor
    Comments (143) | Send Message
     
    Very well done. Enjoyed. These perma-bears deserve a little poking now and then. Actually, although I have seen this guy's name mentioned, I've never seen any of his stuff. Not planning to go looking. There is an audience for just about any kind of outlandish nonsense. Just ask Rupert Murdoch.
    7 Feb 2014, 06:53 PM Reply Like
  • bbarberayr
    , contributor
    Comments (212) | Send Message
     
    Hussman and a lot of the perma-bears have gotten way too hung up on the Schiller CAPE and it didn't work this time. Many articles have been written to suggest why, but reality is that it hasn't. Hussman's Strategic Growth flagship fund is now back under its IPO price after 13 years.

     

    Hussman also seems to cherrypick stats to support his position (a thing almost everyone does), but he seems to be blind to the stats supporting the bullish view.

     

    Too bad, because he seems like a nice person, but really not worth reading for a few years now.
    27 Feb 2014, 09:11 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6198) | Send Message
     
    Author’s reply » I didn't realize his long term performance was that bad. His basic idea, projecting a reversion to the mean at some future date and calculating returns to that point, is logical. If you can avoid full participation in one meltdown it can do wonders.

     

    Lately I've been thinking that these simple arguments that one ratio such as CAPE will revert to its mean are flawed because there are always other variables in the background, that aren't normally distributed and may have binary outcomes.

     

    So far I haven't come up with too much constructive use to make of that line of thinking, although I am working on an article.
    27 Feb 2014, 10:04 PM Reply Like
  • bbarberayr
    , contributor
    Comments (212) | Send Message
     
    Here is one well-written article which you may not have seen which talks about why CAPE may have changed permanently:

     

    http://bit.ly/18GROXs
    28 Feb 2014, 09:20 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (6198) | Send Message
     
    Author’s reply » Wow that is really well done!

     

    It makes me wonder why Shiller doesn't update his work, or engage in meaningful discussion of the issues others are developing. I'm sure he has very capable students who could run with the ball.

     

    I'm going to let the new info filter in for a while. I feel as if there are readers on SA who could benefit from thoughtful discussions on the topic. I will be giving it a shot.

     

    PS I'm going back to the AT in late March, extended section hiking with more time in town on real food. Are you planning any hiking this year?
    28 Feb 2014, 10:00 AM Reply Like
  • Mark Gilliland
    , contributor
    Comments (94) | Send Message
     
    I just checked Morningstar. Hussman Strategic Growth (HSGFX) is down 1.26% per year for the last 10 years. Yet, somehow, this fund still has $1.3 billion in AUM. With an expense ratio of 1.08%, that's $14 million a year in fees! I never knew how much money there was in fear mongering!
    28 Feb 2014, 10:13 AM Reply Like
  • bbarberayr
    , contributor
    Comments (212) | Send Message
     
    Good for you. I think it will mainly just be some weekend hiking around Ontario for me this year. We are also planning on going to Lake Placid this summer and doing day hikes - I hear they have a great variety of trails with nice views.

     

    Good luck with you hike - don't forget to keep eating ice cream before you go!
    28 Feb 2014, 11:33 AM Reply Like
  • MachineGhost
    , contributor
    Comments (33) | Send Message
     
    Husmann doesn't use the Shiller CAPE; its just a simplistic example used to prove the point in his market comments that stocks are once again overvalued akin to the late 90's and subprime crisis. Nothing new about that. But since "perma-bulls" just wave their hand away at contrary evidence to support their faith, they are choosing not to look into the extenuating circumstances of Hussman missing the boat in 2009. He had no issue buying in 2003 when stocks were hardly at a valuation discount, but were at a technical bottom. That is the kind of flexibility required to deal with chronic bubbles.

     

    While hindsight is 20/20, I fully blame Hussman for his inexcusable mistake of not having made his strategy robust to pre-WWII data BEFORE he launched his fund and not have to do so at his investor's expense, which is exactly what occurred. Judging by the stock selection performance, the fund would have been up at least 20% since 2009 without the hedging. But the more important question here is: is YOUR strategy or YOUR fund manager robust to navigating both Depression and post-WWII economic climates?

     

    What I suspect will happen, as markets are the great arbitrager, is that both Hussman and the "perma-bulls" will wind up with the same long-term net return at the end of the day. Only the path dependency will be different.
    24 Mar 2014, 07:57 PM Reply Like
  • ckb
    , contributor
    Comments (108) | Send Message
     
    I don't claim to understand all the math that goes into Hussman's secret sauce...but I keep reading how he insisted on making his model "robust even to Great Depression-era data," and I'm thinking: Wow. That is some kind of robustness he's got there. The only way he could get more robust would be to actually douse his investors' money in gasoline and set it on fire.
    23 Jun 2014, 09:18 PM Reply Like
  • MachineGhost
    , contributor
    Comments (33) | Send Message
     
    There's nothing secret about it, just proprietary. Hussman tracks investor sentiment, technicals and valuation.

     

    There were two big mistakes.

     

    1. Pulling the plug on investing in stocks in November 2008 because the economy was giving out warning signals like during the Great Depression before another 66% market loss occurred (which everyone conveniently overlooks or is completely unware of as their lucky break at this late date).

     

    2. His faulty method of always immediately and fully hedging the market whenever technical & valuation conditions were at an extreme but without first waiting for a sentiment reversal to put them on. Pretty dumb there, but it had worked historically up until QEternity.

     

    Basically it took him 5 years to "figure out" how to deal with the above two problems. In the meantime, he kept using the old model which had the fund continously hedging in the face of QEternity which along with tracking errror from his superior stock picks vs the junk in the major indexes used to hedge, resulted in mounting losses of an order of -40%+.

     

    He may not reply, but he certainly does read public comments about him and his fund despite what he claims. You can even tweet him direct if you like.
    15 Dec 2015, 02:37 PM Reply Like
  • ckb
    , contributor
    Comments (108) | Send Message
     
    Has he, then, "figured out" how to run the fund now? Because 2015 looks like another 10% loss for Hussman.

     

    I mean the story keeps shifting, but the results are pretty consistent. "Two data sets," "ensemble methods," "overlays," "market internals..." I can't really keep up. Point is, he keeps tweaking his model until it says what he wants it to say.
    16 Dec 2015, 09:53 AM Reply Like
  • dirtfarmerdad
    , contributor
    Comments (28) | Send Message
     
    Mr. Hussman should become familiar with the aphorism "John, the markets can stay 'irrational' (by your measure) longer than you can stay solvent"
    14 Dec 2015, 02:14 PM Reply Like
  • MachineGhost
    , contributor
    Comments (33) | Send Message
     
    I'm not so sure it was the market as it was the Fed with its ZIRP. Just goes to show that if your model is not "robust" to new and unexpected drivers, you're going to lose money staring down a freight train.

     

    Technically, Hussman's only been bearish since mid-2014 under his new model that deals with ZIRP and Great Depression-era behavior. Which is smack on when yields on high yield bonds first started to rise, that we're now experiencing the middle innings of.

     

    I'm rather curious about that once his fund makes back all the losses (67%+ gain from here) and again protects the downside in the next downturn, will he suddenly be viewed as a savior again, or will his previous gigantic "tracking error" mistake doom him to all obscurity?
    15 Dec 2015, 02:19 PM Reply Like
  • MachineGhost
    , contributor
    Comments (33) | Send Message
     
    ...Although I'm going to argue Hussman could have made his model "robust" to the Japanese experience where QEternity has long been established to no effect. But, no, he overlooked that just as he did the pre-WWII data when launching his fund. Talk about a prime example of the confirmation bias!
    15 Dec 2015, 02:47 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6198) | Send Message
     
    Author’s reply » Going over the commentary, I guess Hussman's models are elaborate and designed to deal with all possible variables ahead of time.

     

    I'm not sure that's possible, there is always some new permutation of the powers that be pushing and pulling the levers of the economy.

     

    It almost argues for us to follow Jesse Livermore. He said the number one task was to figure out which direction the market is going today.
    15 Dec 2015, 03:28 PM Reply Like
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