John Hussman: Buying Near the Bottom

Includes: DIA, QQQ, SPY
by: John Hussman

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.

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