The Hussman Funds letter to shareholders August 14, 2014 H/T ValueInvestingWorld
The Hussman Funds continue to pursue a historically-informed, value-conscious, risk-managed investment discipline focused on the complete market cycle. From the standpoint of a full-cycle discipline, it is essential to understand the current position of the market within that cycle.
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Hussman Funds on the bull market
Only a handful of instances in history – 1929, 1972, 1987, 2000, and 2007 – match the syndrome of overvaluation, lopsided bullish sentiment, and overbought multi-year equity market speculation as extreme as we observe today. Every instance was somewhat different, of course. For example, on measures that we find most strongly related with actual subsequent total returns, large-capitalization stocks were more extremely overvalued in 2000 than today (primarily because of breathtaking valuations in the technology sector), whereas the median stock is overvalued to a greater degree today than in 2000, making present concerns much more broadbased. The main difference between the recent market advance and those other instances is that severely overvalued, overbought, overbullish conditions have been sustained for a longer period without a material market retreat. In our view, investors should be more concerned about market risk, not less, the longer this delay continues. By the end of a market cycle, the illusions within it are laid bare. That repeated narrative runs through more than a century of market history. Investors might recall the lessons more readily, except that as the legendary value investor Benjamin Graham once observed, “the memory of the financial community is proverbially and distressingly short.”
Investors do not kindly remember 1929, 1972, 1987, 2000 and 2007 for the optimism that brought the stock market to those peaks. Instead, we remember them for the damage that was inflicted when the illusions beneath them were shattered. The unraveling of the late-1990’s technology bubble took only two years, but wiped out the entire total return of the S&P 500 – in excess of the return on risk-free Treasury bills – all the way back to May 1996, while the technology-heavy Nasdaq Composite lost more than three-quarters of its value. Likewise, the unraveling of the mid-2000’s housing bubble took less than two years, but wiped out the entire total return of the S&P 500 – in excess of the return on risk-free Treasury bills – all the way back to June 1995.
Hussman Funds investment results
Investment results over the full course of the market cycle are determined not only by what happens during a bull market period, but also what happens as the cycle is completed by a bear market. While past performance does not ensure future results, it is instructive that, on a total return basis, the S&P 500 (INDEXSP:.INX) lost -47.41% from the bull market peak of the S&P 500 on September 1, 2000 to the bear market low on October 9, 2002, while Strategic Growth Fund gained 47.83%. Assuming equal initial investments in the S&P 500 and Strategic Growth Fund at the bull market peak, the investment in Strategic Growth Fund, by the end of the bear market, would have been worth 2.81 times the value of the investment in the S&P 500. Similarly, the S&P 500 lost -55.25% from the bull market peak of the S&P 500 on October 9, 2007 to the bear market low on March 9, 2009, while Strategic Growth Fund lost only -6.47%. Assuming equal initial investments in the S&P 500 and Strategic Growth Fund at the bull market peak, the investment in Strategic Growth Fund, by the end of the bear market, would have been worth 2.09 times the value of the investment in the S&P 500.
We fully expect that the phrase “QE bubble” will soon enough join the list of phrases like “housing bubble,” “tech bubble,” “dot-com bubble,” “New Economy,” “go-go years,” and “roaring 20’s.” The delusions associated with each period seem self-evident now. It is easy to forget that overvalued, overbought, overbullish extremes are the same today as they were at those points, and investors then believed precisely the same thing: this time is different.
Hussman Funds: Understanding the half-cycle since 2009 from a full-cycle perspective
Despite the tendency of the financial markets to experience repeated bouts of speculative delusion and collapse, our job remains to achieve strong long-term returns for our shareholders without exposing them to the steep losses that often characterize a passive investment approach. The recent half-cycle since 2009 has been challenging in this regard, and it is important to understand why. This understanding not only helps to place our recent performance in perspective, but also helps to clarify what investors should expect from our discipline over the completion of the present market cycle and beyond.
Consider the Hussman Strategic Growth Fund over the complete market cycle from the 2000 bull market peak to the 2007 bull market peak. From the inception of the Fund on July 24, 2000 through October 9, 2007, Strategic Growth Fund achieved a cumulative total return of 119.79% (11.54% annually) compared with a cumulative total return of 20.70% (2.64% annually) for the Standard and Poor’s 500 Index. The deepest peak-to-trough loss experienced by Strategic Growth Fund in that period was -6.98%, compared with a -47.41% loss in the S&P 500 Index.
See full Hussman Funds letter to shareholders in PDF format here.