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I am a long time follower of the market with an interest in the theory and history of financial markets. Historically I've put most of my efforts into my career as a private equity investor, both in companies and now in funds. However, the recent market turmoil has led me to take a much more... More
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  • John Hussman and the Parable of the Talents 0 comments
    Apr 22, 2010 9:48 AM | about stocks: BRK.A
    Matthew 25:14-30 (New International Version)

     

    The Parable of the Talents 14"Again, it will be like a man going on a journey, who called his servants and entrusted his property to them. 15To one he gave five talents[a] of money, to another two talents, and to another one talent, each according to his ability. Then he went on his journey. 16The man who had received the five talents went at once and put his money to work and gained five more. 17So also, the one with the two talents gained two more. 18But the man who had received the one talent went off, dug a hole in the ground and hid his master's money.

     19"After a long time the master of those servants returned and settled accounts with them. 20The man who had received the five talents brought the other five. 'Master,' he said, 'you entrusted me with five talents. See, I have gained five more.'

     21"His master replied, 'Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master's happiness!'

     22"The man with the two talents also came. 'Master,' he said, 'you entrusted me with two talents; see, I have gained two more.'

     23"His master replied, 'Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master's happiness!'

     24"Then the man who had received the one talent came. 'Master,' he said, 'I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. 25So I was afraid and went out and hid your talent in the ground. See, here is what belongs to you.'

     26"His master replied, 'You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? 27Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest.

     28" 'Take the talent from him and give it to the one who has the ten talents. 29For everyone who has will be given more, and he will have an abundance. Whoever does not have, even what he has will be taken from him. 30And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.'

    Hussman Strategic Growth Fund

    Average Annual Total Returns(b)

    (for periods ended March 31, 2010)

    1 Year 3 Year 5 Year Since Inception(c)

    -2.55% -0.91% 1.24% 7.94%

    John Hussman is like the 3rd servant in this parable (which has many meanings but is clearly one of the earliest primers on investing!): he is so averse to risking any capital that he fails to generate any return.  In this, after following him for several years, I feel that he is guided more by his impressive academic knowledge than by any pragmatic approach to the markets.  He seeks a level of clarity and insight that just does not exist in the markets.

    There is a huge difference between what "should be" and what is. Dr. Hussman's approach relies extensively on what should be, and it is nigh impossible for rational minds to disagree with his current analysis that US stocks are approaching a point of overvaluation based on long-term historical measures. In the long term, he will be proven right; the question is whether it is worth it to his investors to pay his 1.04% management fee for years and years.

    OK, 1.04% is actually quite reasonable when compared to other funds, but of course this is the argument that bankers make about bonuses. If you look at his returns, they derive from a good call around 2000, and he's done nothing meaningful since. I was a big fan until he demonstrated his reliance on ideology over pragmatism and skipped the market low in March.  See my comment on his column entitled "Are Stocks Really Undervalued?" on March 19th, 2009.  Yes, John, stocks were really undervalued then as pretty much all the great long-term investors realized!!

    This reminds me of the classic joke of the economist who failed to pick up a $1000 bill lying on the ground because "there is no such thing as a free lunch" in economics. 

    I read him faithfully every week, not as a stock market tactician or strategist, but as an economist resource. Together with GMO's rare postings on their web site and Andrew Smithers, they bring a sobering perspective. And I don't disagree with Dr. Hussman's analysis, only the implications. F. Scott Fitzgerald could not have described Dr. Hussman's failing better:

    "The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function."

    In spite of his current figleaf about two data sets (a convenient excuse to avoid taking any action -- as if in life we all walk around confronted with "one data set" and have perfect clarity -- Dr. Hussman has not retained the ability to function, at least not any better for investors than a conservative stock/bond/cash allocation would have done and without a 1% management fee.

    Dr. Hussman should take his "talents" and make something of them; otherwise his "masters" will take them back and give them to someone else, like Warren Buffett, who knows when to pull the trigger.


    Disclosure: None mentioned
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