In Defense of John Hussman’s Performance by Economic Musings

Note: John Hussman is talked about frequently on Twitter. For what it’s worth, I largely agree with a lot of what he says, yet disagree with his positioning so count me amount his critics.  I find his commentary interesting and he also seems like a great guy personally, so any criticism is certainly not in a personal context.  Below is a guest post from a friend of mine David Horn who is a professor of value investing at Columbia.  Given the discussion of Hussman I thought readers would find this interesting. – David Schawel 

John Hussman is a polarizing figure in the investment community.  His performance ranks near in the 4th, 4th, and 7th percentile in one, three, and five year performance, respectively.  Hussman is chided for “missing the rally.”  Worse, he’s actually experienced a drawdown over the past six years.  When he posts a chart or commentary on Twitter, he is targeted with vitriol.  It is not a mystery why he receives criticism, but if your inclination is to disregard his work as JUST PLAIN WRONG, I think it is important to at least consider the following:

From his fund’s inception in July 2000 to 2008, Hussman outperformed the SPX by more than 12%.   A YEAR.

I appreciate he has given back that outperformance.  And I am not suggesting Hussman is beyond reproach, or that he cannot be criticized.  He’s fair game, like everyone else who manages money for a living.  But if he’s an idiot now for underperforming and missing a rally, was he a genius earlier for outperforming and doubling his client’s money in a period when the SPX fell by 30%?   What does it say about our eagerness to apply labels?  Which is he, genius or idiot?  Is it all just a factor of what he’s done lately?

Taking a Closer Look

The following is a list of criticisms I’ve read regarding Hussman’s funds and overall strategy.  I will reference Hussman Strategic Growth, HSGFX in particular):

1) Hussman’s drawdown in the last six years is unacceptable.

2) Hussman is underperforming the S&P by -9.85%/yr. over 10 yrs., therefore…..

3) He is too far in the hole even if he is eventually proven right.

4) A strategy of buying puts on the S&P is flawed because of the negative carry.

5) Betting against the S&P over long periods is a loser’s game.

6) Hussman screwed his investors – they should not be subjected to these returns.

Let’s address these issues:

1) Hussman’s drawdown in the last six years is unacceptable.

HSGFX peaked on 9/30/08 at an NAV of $14.19.  At a current price of $9.13, that is a drawdown of 36%.  Here is a chart of HSGFX since inception in July 2000:

John Hussman

John Hussman

 

 

Exhibit #2

Let’s put this drawdown into context.  From 9/1/00 to 10/9/02, the S&P 500 Total Return (SPTR) fell 47%.  From 10/9/07 to 3/9/09, it fell 55%.  But fine, let’s hold Hussman to a higher standard.  “We pay you to not suffer the drawdowns that the market does.”  Fine!  Fire all mutual fund managers that have drawdowns the size of Hussman’s.  But if you start looking at mutual fund performance during the ‘08/09 periods, you start to reconsider that.  How many luminaries that CNBC marches out daily had larger drawdowns?  Where’s the vitriol?  Where’s the outrage?  Why aren’t there calls for these managers go give back their fees?  We don’t see charts of crummy MF performance and drawdowns during ‘08/’09.  Because it would break Twitter’s servers.  We’re not finished with this thought, but let’s move to points 2 & 3:

2) Hussman is underperforming the S&P by -9.85%/yr. over 10 yrs., therefore…..

3) He is too far in the hole even if he is eventually proven right.

Here’s what we see if we look at Hussman’s semi-annual report from December 2008.

Exhibit #3

John Hussman

 

As I mentioned in the introduction, during a 7.5 year span when the S&P fell by almost 30%, Hussman doubled his clients’ money.  He outperformed the S&P 500 by over 12% a year.

Let’s take another look at Exhibit #2.  Hussman was outperforming the S&P since inception until this year.  Which clients is Hussman screwing, exactly?  The investors that were there from Day 1?  I suspect it would not take much of a drawdown in the overall market for him to regain his outperformance since inception.  As far as the investors that purchased shares exactly ten years ago?  Well, during that ‘00-‘02 47% S&P drawdown, Hussman was up 47%.  Hussman currently claims the S&P is overvalued by 100%.  So if it gets cut in half, who’s to say he doesn’t reclaim that lost alpha?

4) A strategy of buying puts on the S&P is flawed because of the negative carry.

In Exhibit #2, Hussman actually breaks out how hedging has impacted his performance.  The blue line is the Fund, and the purple line is the Fund unhedged.  For the first 10 years of Hussman’s fund, hedging paid off.  Lately it hasn’t.  But you cannot say categorically that put buying is bad.  Imagine I offered you a put option that paid off 100:1 if the SPX fell below its 200 DMA anytime over the next three years.  I suspect every reader would gladly buy this contract.  Most people would buy a put on the S&P if the price was right.  If critics claimed “Hussman overpaid for puts on the S&P,” it would be having a different (much tougher) debate.

5) Betting against the S&P over long periods is a losers game

I suspect Hussman would agree with this statement.  Go back to exhibit #2 again.  From ’00 to ’03, it appears all of Hussman’s gains were a function of hedging (the purple line is unchanged since inception).  Then the blue and purple lines seem to move in relative lock-step.  It does not appear that Hussman was doing much hedging at this point.

Betting against the S&P over long periods is a loser’s game.  But there have been a few periods in the past 14 years when it’s been terrific.  It sure worked well from ’00-’02.  It worked great during ‘07/08.  And it doesn’t appear Hussman did much hedging during the ’03-06 period (performance was strong with the market).  Yes, Hussman has hedged lately with no success.  But there are periods when hedging worked, and there are periods when he didn’t hedge.  This also goes against the theory that he’s a permabear.

Hussman believes we are in a bubble.  If he’s proven right (like he was in ’00 and ’07), then hedging will prove to be very smart.

6) Hussman screwed his investors – they should not be subjected to these returns.

Clearly this statement relates to experiencing a drawdown during the rally of the past six years. As we addressed earlier, a Hussman investor from the beginning also “missed out” on two massive drawdowns in the S&P.  Again, if Hussman is proved right about this being a bubble, then his investors will likely do well.  Will his critics turn their sites on other managers, who might very well give back all of their gains of the past few years?

A few more thoughts

I am not making light of Hussman’s drawdown and his performance over the past six years.  I’m not disputing it or making excuses for it.  But Hussman’s critics don’t seem to look at the entire body of work.  Here’s why I believe Hussman is the focus of such criticism:

–      It isn’t the size of the drawdown.

–      It isn’t the duration of the drawdown.

–      It isn’t the performance since inception, either absolute or relative.

–      IT’S THE TIMING

In my opinion, the reason Hussman gets pilloried on Twitter is because he is down when everyone else is up.  That is fatal in this business.

Earlier this year, Hussman’s performance was equal to that of the S&P over 14 yr.  And yet the criticism started earlier than that.  If he had his drawdowns in ’00 and ’08 like everyone else, would anyone care about him one iota?

My guess is no.  And this is why so many managers hug the index.  This is why there’s safety in the herd.

STOP ENCOURAGING THAT BEHAVIOR!  What is the message?  Do not DARE miss a rally.  In the late 90’s, technology was 35% of the SPX.  Portfolio Managers had a choice.  Own tech, or look nothing like the S&P.  What do you want your PM’s to do?  Stop encouraging herding!  If you want to feel sorry for a client base, feel sorry for investors in funds that hug the index.

And there’s another reason nobody should feel sorry for Hussman’s clients – I know of no other mutual fund manager who goes to greater lengths to explain his investment methodology.  Everyone who bothers to read knows exactly what they’re getting with Hussman.  I don’t think you can say that for a lot of fund managers.  Why do people assume Hussman’s clients don’t understand his investment philosophy?  What if they own Hussman as a countercyclical hedge?  Hasn’t he proven to be one for the most part over the past 14 years?

And have you read his weekly market comments?  Go ahead and mock Hussman, but then go read what he writes.  The gist is that future returns are going to stink.  Do you know who else has echoed that sentiment in the past two years?

GMO – see their monthly 7 yr. expected return targets or their quarterly letters.  They say we’ll be in bubble territory at SPX 2,250, not too far away.

Ray Daliohttp://www.valuewalk.com/2014/07/bridgewater-sounding-alarm-market-valuations/

Cliff Asness – In 2013 he said a 60/40 portfolio has been cheaper than it is now 98% of the time.  http://online.barrons.com/articles/SB50001424052748704719204579029044200840798

Asness has done terrific work on CAPE and wrote a paper dismantling many of the popular criticisms of the metric.

None of these investors are permabears.  And yet all share some of Hussman’s concerns for future returns.  In general, we don’t have the opportunity to get into the heads of these great investors.  We just get snippets here and there.  Hussman comes to many of the same conclusions, and he writes weekly.  It’s a unique perspective and it’s free.  That’s rare in a world where most people are permabulls or doomsday preppers.  Maybe he wasn’t the genius people thought he was, but he’s probably not the idiot that’s mocked on Twitter, either.  Use him as a resource.  Consider the merits of his arguments and ask yourself how you might be impacted if he’s proven right again.

If you’re wondering who I am, here’s a bit about me:

I am the Portfolio Manager of Kiron Partners LP, a long/short fund I started in 2006.  I am also an adjunct professor at Columbia Business School.  I co-teach Applied Value Investing with a friend and fellow CBS alumni.

My first job out of college was at Sanford C. Bernstein.  It was the late 1990’s and I saw first-hand how quickly sentiment could change regarding perceived intelligence of an asset manager.  I’ve seen it many times over the course of my career, and I have experienced it myself.  My returns have been countercyclical – very strong in the crisis, and weak as of late.

One of the reasons I like teaching so much is to prepare students for the reputational risks they will encounter if they pursue the career path of value-oriented asset managers.  Value investing is easy on paper.  Being a contrarian sounds edgy & smart.  Most students think they will be Seth Klarman, who has spent most of his career beyond reproach.  The reality is, the best of them will be lucky to match the performance of GMO, who lost 2/3 of their investors during the late 1990’s.  Bob Rodriguez at FPA says his firm saw redemptions of 50% when he alerted the world to what was coming in ’00 and ’08.  If Twitter was around back then, I can only imagine what would’ve been said about those investing legends.

If you want to continue the conversation about this topic or others like it, feel free to email me at [email protected].  I look forward to the dialogue, and I thank David for posting my thoughts on his blog.  He appears to be a very popular fellow, and I’m glad I’ve had the chance to exchange ideas with him.

-David Horn