New Year’s Resolution #2: Define the Agenda
A consistent theme at "A Dash" has been the application of knowledge that is well known in social science, but not understood by most market participants. This is something you will not read anywhere else.
In political debate, one of these themes is definition of the agenda. Those who define the terms of the debate will win.
The challenge for investors is to understand and to apply this concept. Most market pundits define the question in a way where they have an obvious answer.
But what if they are asking the wrong question?
A Typical Example
The current market comment from John Hussman (excerpts on Seeking Alpha) argues that central banks are doing "liquidity absorbing" transactions so the "liquidity injections" are misleading to investors. We cannot find a good quotation to summarize this, so read the article to check yourself.
Regular readers of "A Dash" will readily see the problem. So will anyone who is following blogs by economists. The Hussman evaluation does not accurately describe the policy goals of central banks.
Central banks are doing two quite different things. They have reduced interest rates and added liquidity. They have also adopted innovative methods to get liquidity where it is needed. This includes the ECB injections, the Fed’s TAF plan, and the swap agreements between the Fed and European Central Banks.
Conclusion
We attempt to avoid ascribing motives to market pundits, but we are mystified by the Hussman commentary. He is an informed observer, albeit one who has been on the wrong side of the market in recent years. It would be more useful if he were to comment on how the various liquidity moves were working in terms of the stated goals of the central banks.
Instead he is setting up a straw man and knocking it down. This is a classic debater’s tactic. Astute investors should beware of pundits who ask the wrong questions. Discovering the real issues, and the right questions to ask, is one of the most important challenges to an investor seeking to understand the global economy.
New Year’s Resolution: Think for yourself in determining the right questions. Read critically. The first step to good investing is defining the issues and the agenda.
You know, I never felt the need to be “force-fed” by feed readers until I started reading your articles.
Then I installed one in my computer to be sure I wouldn’t miss anything you write, and I am very glad I did.
Thanks for the balanced advice and sensible comments. Have a great 2008 and let’s make money by thinking straight.
A clarification on my reporting of Hussy’s performance: Calendar year (CY) 2005, his NAV return was 2.083% vs. the SPY return of 3.011%, but when taking distributions (HSGFX) and dividends (SPY) into account, his total return (pre-tax and pre-expense) beat that of the SPY by a relatively inconsequential amount (5.75% vs 4.83%).
Using Yahoo!Finance data and looking at the year just past, Hussy’s HSGFX appears to have underperformed the SPY significantly on a NAV basis, and, despite having paid out more than twice the distributions made by SPY of dividends, underperformed the SPY in total return by a fairly trivial 4.14% versus 5.15%.
Despite this five-year record of underperformance to the SPY in terms of total return (about 4.75% of underperformance on an annualized basis), I calculate that his AUM has almost quadrupled since (and probably BECAUSE) he started his weekly bearish screed in September of 2003.
I definitely see him and his ilk as having an agenda, and pushing it, in terms of generating increases in assets under management through scaring potential investors into having them manage their assets during these “unfavorable market conditions.” The management portion of expenses on his funds is almost 1%, on almost $3 billion under management.
Is his bread is better buttered by keeping people with him through scare tactics than it would be if, say for example, he had doubled the bull market’s return while merely doubling his AUM? Or if he tripled the bull market’s return while managing only his own assets? One could ask this of other managers and “hedge fund consultants,” and also ask this of those who seek publicity through the media – how do they get the most of it?
There is a powerful incentive for money managers to put forth an agenda, rather than dispassionate analysis, when providing market commentary. Kudos to you, Jeff, and a precious few others, for simply calling it like you see it.
Thanks to both Roger and Bill. We are trying to provide a service. It has no direct monetary gain for us, so it is nice to hear from readers who find the analysis helpful. We hope it was also profitable in 2007.
I don’t want to rehash the debate about Hussman’s performance which is getting old and tired. Obviously, he has underperformed badly during the bull market, and I do believe his “market action” variable is flawed.
Interesting side point factoid about valuations and LT returns. 8-year CAGR of the S&P 500 is 1.6%. 9-year CAGR of the S&P 500 is 3.6%. Clearly, starting valuation levels are a key determinant of ***LONG-TERM*** returns.
Rhetorical question, and no answer needed, but I do wonder why anyone who would claim to be “dispassionate and objective” wouldn’t look at the full record since inception instead of a shorter time frame. Putting aside the whole debate of what constitutes “a full cycle” it seems common sense to me, one would always choose a longer time frame compared to a shorter one to evaluate performance.
I really wanted to address this part because it is so completely off the mark.
“I calculate that his AUM has almost quadrupled since (and probably BECAUSE) he started his weekly bearish screed in September of 2003.
I definitely see him and his ilk as having an agenda, and pushing it, in terms of generating increases in assets under management through scaring potential investors into having them manage their assets during these “unfavorable market conditions.” The management portion of expenses on his funds is almost 1%, on almost $3 billion under management.”
I would bet an ENORMOUS sum of money that the vast majority of Hussman’s AUM is NOT the individual retail investor who is “scared”. The typical retail investor is a performance chaser and trend follower that gets into trends as they end. Think large-cap growth in 2000, or small-caps and REITs in 2006. Check mutual fund flows on that. This really is indisputable as there are plenty of studies that demonstrate this is the case.
I’ll just about guarantee that the overwhelming majority of Hussman’s AUM are professional investment advisors who understand and buy into his approach (which is why AUM hasn’t fallen despite mediocre performance for the last couple of years) and who do NOT use his fund for 100% of their portfolio, but just the percentage they want to “play defense” with. In my model portfolio, HSGFX is only a 8% allocation. So it has been a minor drag at best, and having such a large Berkshire stake the past couple of years more then made up for it.
As far as a “marketing agenda”:
http://www.hussman.net/wmc/wmc071105.htm
“******************A final “anti-marketing” message************: As I frequently emphasize, the Strategic Growth Fund is intended for investors with the objective of achieving long-term returns in the stock market, with added emphasis on defending capital. It is a growth fund, not a bear fund, nor a market-neutral fund, and as such is managed with the intention of achieving total returns in excess of the S&P 500 Index over the long-term, measured over the complete bull-bear market cycle. However, the Fund is not appropriate for investors with investment horizons encompassing less than a full cycle, and is emphatically inappropriate for investors wishing to closely track market fluctuations. ************Investments by such investors are discouraged.”*********
That doesn’t sound to me like “I want to scare the s*** out of you so you will give me your money to manage”. Only the most cynical would suggest some kind of reverse psychology ploy here.
I don’t know. Really odd to me, but you almost seem to have some sort of personal thing here when you start ascribing motives to people you couldn’t possibly know.
3 years is enough of a record to detect a flawed methodology, given the stated fund purpose in the prospectus and turnover rate of the assets. 5 years, more than enough.
Any total long-term result needs to be looked in in terms of smaller units. Would you invest in a system based only on returns from inception, when the system looked like this? +200%, -1%, -1%, -1%, -1%, -1%, -1%, -1%, -1%, -1%? Such a system would have made +10.6% CAGR over ten years …
I’d bet money his continued increase in AUM, despite sucking wind in performance, is directly related to his weekly bearish marketing screed. Professional investment advisers can fall for bullshit just like the retail clones can. It’s easier to “buy into the mentality” when he’s one of the few fund
managers making a sales pitch every week, and the sexiness and attractiveness of the bear position is well-documented – it’s incredibly popular on the web!
The bottom line is that his methodology for identifying bull markets is flawed. By openly criticizing him, and others with flawed methodologies and faulty analysis, I am doing a favor to readers, who might otherwise be suckered into investing mistakes.