According to Morningstar over the last three years $10,000 invested in HSGFX would have shrunk to $9193 versus $9300 for the S&P 500. The five year comparison is worse at $9868 versus $11,017. The ten year number is where the Hussman Fund shines at $17,778 versus $11,272. Reasonably speaking there probably aren't too many shareholders who have been in the fund for ten years (it started in July 2000) as not too many people understood what was happening back then even if Hussman did--and make no mistake he did understand.
The last few years for the fund provides a great learning opportunity. If you are familiar with Hussman's commentaries then you know that market conditions have been very unfavorable for a long time offering a poor expected average annual return over the next ten years, as he sees it, well below normal to the point of being unattractive. The conclusions are based on valuations and what these numbers have meant in the past.
While I am not certain if the methodology was exactly the same when the fund started, the results have been different. The vast majority of the $17,778 for ten years occurred in the first three years with $10,000 growing to $16,165. So since 12/31/2003 the fund is only up 9.9% versus 30.2% for the S&P 500 including dividends. Hussman is a big believer in looking at the entire stock market cycle (me too). It might be reasonable to date the last cycle to March, 2003 forward. In that time $10,000 in HSGFX has grown to $13,552 versus $16,393 for the S&P 500.
During the tech wreck HSGFX appears from the chart to have had a negative correlation to the S&P 500 as the fund went up a lot. Fast forward to the Great Recession and the same effect was not captured. One way to look at this is that he is one for two. Does that merit giving him the benefit of the doubt? It probably does but ultimately that one is in the eye of the end user.
In looking forward with him let's say he turns out to be correct that the US market averages 3-4% per year for the next decade. This would result in growth that is below "normal." The previous decade was below normal in the US as well and yet there were plenty of other countries that had normal or better than normal decades. If Hussman is correct there will be countries in this decade that are also normal or better than normal. They may or may not be the same countries as the last decade but there will be plenty that do well.
Another outcome that allows Hussman to be correct is some combination for the US market of years up 20-25%, down 20-25% such that it averages 3-4% annualized. Against that backdrop a strategy that targets being up 20% in an up 25% year versus down 10-12% in a year where the market is down 20-25% (I believe this can be done heeding the 200 DMA) would yield a result far above 3-4% annualized. I doubt this is something Hussman would feel comfortable with as his track record has been to heed his own analysis of current conditions which is a subjective approach versus something objective like a moving average or the like.
However we all must prepare for an outcome that is unlike anything in the previous ten years. A general idea ahead of time is important but so too is the ability and willingness to make changes as circumstances dictate assuming of course you actively manage your portfolio.Finally a public service announcement albeit tardy by a couple of days. The Versus Channel is showing a daily highlight show for the 2011 Dakar Rally that is going on right now. I've mentioned this in years past, it is a very neat event. The big trucks are my favorite.
16 comments:
4% per year draw seems needs some work.
First I want to say I understand and respect Rogers position on 4%, but let me explain by example.
Pretend some couple has 2.5 million and no other income (simpler example). They can draw $100k/year. If you do not live in NY city this should be doable. But lets suppose gains in recent years result in $80k in taxes this year and $50k in taxes the following year. If not for large capital gains taxes would be closser to $12K/year leaving $88k/year to spend.
If you just draw $100k in those high tax years you would only have $20k and $50k to live on. The $20k just does not seem doable. The $50k seems crazy. Reducing you spending to $50k, because yor portfolio is growing rapidly just seems crazy to me.
OK future tax planning may be needed but how would you deal with the 4% draw?
Hussman's Total Return Fund (HSTRX) seems to have better performance - HSTRX
I'm not sure how you could have $2.5m of retirement savings and get into that tax situation.
Assume NONE of your money is in a tax advantaged account.
1. You can't sell $100k and have $80k in taxes due.
2. Suppose the entire account paid dividends/interest/income at 3% . That's $75k in dividends, which isn't going to produce $80k in taxes.
What process is creating $80k in taxes?
I think one problem Hussman faced was a rather unexpected outcome of excess liquidity (possibly index funds too). His technique involves selecting quality stocks and then hedging them with indexed products. The index naturally includes a large number of lower quality stocks and that improves the edge but what has been happening is that 'junk' stocks have been doing just as well as 'quality' stocks in his universe.
Steven Drone is correct. I am in a somewhat similar situation. Retired on my own self reliance and living on roughly 4% drawdown from my assets. Taxes are a minimal issue. Dividends mostly taxed at 0 or 15% max. Bond interest not from munis taxed at income tax rate. Can't see how your tax rate gets beyond 25% no matter what unless you foolishly sell all assets that have gained each and every year??
S&P 500 has been a dud --- comparing his fund to the S&P 500 should be an easy comparison. But he's underperformed that.
This argument of 'high-quality, not junk' is ridiculous. Sometimes high-quality outpeforms -- sometimes other stocks outpeform. You could just as easily argue that 'high-quality' (high ROE etc..) just leads to large-cap mature, defensive stocks. That is the place to be sometimes. But not ALL the time.
Chris, he says that his stock picks outperformed the market so then too much cash would create a drag (which was not the case) or too much hedge could create a loss (which must have been the case) which almost make the case that last year it was a portfolio of put options hedged with some stock--I am exaggerating but you get the idea.
Yes, I see your point and agree.
The one thing this high-quality argument does is kind of let you have it both ways. If the market goes down, you outperform because you are in defensive companies and you hold cash.
If the market goes up and your defensives don't do so well, then 'junk' is outperforming and that is unsustainable.
It seems to me a more appropriate benchmark is something like a lage component of corporate bonds and then small allocation of S&P 500. That portfolio does the same thing -- outperforms in down markets and goes up some (but underperforms) in bull markets.
I sold everything in 2007. I had a 55% portfolio gain in 2009 some in ira some taxable. I sold some things in 2009 and some in 2010. I also had some income from work. The numbers are fictitious but close enough for these discussions.
My main point is large gains are possible - thankfully
I was just hoping for some input from this group on how to handle the potential of large gains in the future. I could hire a financial planner but I think I may know more and I think many on this blog know even more than I do.
Re: You can't sell $100k and have $80k in taxes due.
With a 2.5M portfolio, it's theoretically possible. If the 2.5M is invested in mutual funds with huge turnover, you don't need to sell anything and still end up with fat distributions that you get taxed on.
Good post, Roger.
I think Hussman is a fascinating and extremely bright guy. I read his commentaries religously every week. The thing I find most interesting about him is that he seems to have an almost limitless capacity to stand apart from the crowd and maintain his equanimity.
The fact that he has underperformed the S&P 500 for the past 1, 3, and 5 year periods is surprising and unfortunate for him and his shareholders. But that was certainly not the case if you measured it during mid-2008, for exasmple; at that point in time, he had significantly beaten the S&P over those horizons. So I wouldn't count him out just yet... he may be proven right after all.
-aagold
I remember in 2008 when WSJ ran a story on Hussman and praised his investment prudence. To me, that signaled the bottom of the market. Could your post signal the top of the market?
Time will tell.
I think 4:59 and 6:51 make good arguments, but I think Roger also makes a good point that you should not get stuck in an ultra bear or ultra bull position. Markets can go up for a long time even if over valued.
I just hope it does not continue
I sold the vast majority of my HSGFX (only a few very small accounts still hold it) a few months ago, and I had been a long-time fund shareholder having first bought the fund in 2004.
Ultimately, Hussman is obviously a very smart guy who has been "right" on a great number of things, but has had difficulty translating that into decent absolute returns if you subtract out 2000-2003.
I think he is absolutely correct about his valuation arguments but clearly since about 1996 we have been in a new paradigm for valuation range (something as simple as dividend yield post 1996 compared to the previous several decades illustrates that).
The problem I have is Hussman says he uses "market action" which is really just code for technical analysis, yet I've noted he is often saying "unfavorable" market action when every other technical metric, 200 DMA, 50 DMA/200 DMA crossover, Dow Theory, Russell PTI, Lowry's, are ALL saying bull market.
He wrote a skeptical note attacking the golden cross in early-mid 2009 when it occurred when one should have correctly heeded it was saying bull market (we have recently gotten another golden cross after the false death cross signal in the summer.
Bottom line, I have no idea what he is using to differentiate bull market price action from bear market price action (completely setting aside the valuation question) so I have no confidence he will capture a continued bull run.
Apparently, in recent weeks, he has tweaked his models to capture more of "positive market action" but I remain skeptical.
Something as simple as 200 DMA in isolation has done better then his models in terms of when and when not to be defensive.
Academics and theoreticians have a tough time over the long term in the stock market, which requires the employment of perverse psychology which is not taught in universities... ultimately the market does not care what you know... it only cares what it wants to teach you... and that usually happens at the expense of yours and your shareholders money...
Academics are great at knowing when to get out (some of them), but horrible at knowing when to get in, because the point at which you get in usually does not compute...
Hussman has always run a great fund for stock investors who do not wish to be involved in the stock market... as always, the price paid for "risk-control" is a heavy one...
I think his weak returns over the past few years are a consequence of a flaw in his valuation methodology.
To value the market, he normalizes corporate earnings based on profit margins. In this normalization, he uses average profit margins spanning all the way back to the early part of last century.
There are two potential mistakes in this approach. First, our economy has evolved significantly over the last thirty years. Technology has afforded corporations increased efficiency and added protective barriers that they did not enjoy in previous eras. It is entirely possible that these changes have changed the profit margin that a company can achieve under "normal" economic circumstances. Second, the weighting of the S&P 500 has shifted significantly over the past 30 years. The weighting towards technology is much higher, and technology is naturally a higher margin industry.
I'm not entirely sure about the extent to which current elevated profit margins are explained by fundamental changes in the nature of our economy, but I am confident that these changes are a significant part of the explanation.
The bears have been protesting elevated profit margins for the last thirty years, yet there has been no sign of a sustained compression or trend downward. While I do see some compression from current levels, I don't think it will be nearly enough to get us back to the mean of the last 110 years.
Hussman's problem he continues to wait for that mean. He was waiting for it in 2009 as the market rallied, he was waiting for it in 2010 as the market bottomed. He's waiting for Gdo--my hunch is that it's not coming. There is a flaw in his way of valuing the S&P.
If he would investigate that flaw further and try to figure out exactly where his valuation model is wrong or can be tweaked, I think his talents would show forth more clearly in his performance. If he could have stayed net long in 2009 while the market was trekking towards 10,000, or in the summer of 2010 when valuations were attractive relative to the last 10 years,
He also uses the Schiller P/E, and I am skeptical of that because the BLS began to use a different definition of inflation in 1982. That explains the huge move up. If you apply the pre-1982 BLS definition of inflation to the years thereafter, you will see that we are not far from the average 100 year multiple. Currently, we are at 16.1 versus an average of about 15.2. See the work of Doug Short on dshort.com for more information.
http://www.dshort.com/articles/SP-Composite-pe-ratios.html
To clarify, I don't disagree that stocks are overvalued right now. I definitely see a move down from the current euphoria, and I think he's absolutely right to be bearish. But he was wrong to be so bearish in June of 2009, or in July of 2010. The profit margin analysis that he used to conclude the market was overvalued at those times, especially in the early parts of the 2009, was flawed. Unless he tweaks that model, my fear is that he is going to continue to miss all of the buying opportunities that emerge in the next 20 years, and that the underperformance will continue.
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