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Three Things I Think I Think

The latest edition of three things:

1.  I wanted to start by just saying thanks to everyone who reads this site and supports my work.  I don’t say that enough.  Which is pretty crappy of me.

This website is a strange part of my life.  I would have never guessed I’d put so much time and effort into a website if you’d told me that 5 years ago.  But it’s been life changing in ways. I’ve learned so much from so many smart people and I appreciate all the nice people I run into here who give me great feedback and support what I am trying to do.  I won’t get all sappy on you, but thanks.  I mean that.

2.  Larry Swedroe drops the boom on John Hussman in this piece.   It’s a harsh criticism.  I have a huge amount of respect for John Hussman and Larry Swedroe.  They’re both brilliant guys.  And while John’s performance has been pretty, um, bad, in recent years, I do think Larry contradicts himself a bit.

The whole point of the article is to focus on long-term results and avoid forecasting.  He even quotes Warren Buffett.  But in berating Hussman Larry fails to point out that he’s demonizing John’s 5 year performance while quoting a guy who has also underperformed the S&P by his own metric for 5 years.  Yes, Buffett’s own annual reports have discussed the poor recent performance of Berkshire Hathway relative to the S&P 500 where book value per share has lagged the S&P 500 by 5.4% per year.  So it seems a bit contradictory to judge a manager’s short-term performance when you’re emphasizing a long-term perspective.

Anyhow, I think Larry makes some great points.  I disagree with his general point on forecasting since I think portfolio construction involves, at a minimum, implicit forecasts, but it’s a good pieces so go have a read.

3.  Morgan Housel writes just about the most honest thing you’ll ever read on the finance industry.  I won’t spoil it for you, but there are some dark corners in this industry that could use a bit of light.  And I think we’re moving in the right direction.  But there’s a lot of work to be done.



  1. Dctodd27

    Swedroe is hung up on the performance of the fund over the last 1 and 10 years, which are arbitrary numbers. You’ll notice no one actually looks at full-market cycle numbers for HSGFX, ie peak to peak or trough to trough. Additionally, equity bubbles have a way of making prudent investors look stupid, at least for a while. Consider the experiences of the likes of Eveillard, Grantham and Yacktman in the late 90’s.

  2. Digitking

    That’s easy to say if your not invested in the fund. If you were invested in the fund, would really be happy just sitting in a fund with a negative 1,3,5 and 10 year annualized return (ie you’ve lost money the last 10 years when the market is up approx. 220%)? I don’t have time to check right now but even during the peak of the tech bubble in 1998/1999 I doubt Eveillard or Granthan and negative 10 year numbers.

    I agree with Larry on most of his points about Hussman, maybe he’s turns out to be right and there’s another crash. But from an investors perspective (which thankfully I’m not) he’s screwed up so badly and underperformed so massively that it’s going to take a massive collapse for him just to catch up to the index (let alone beat it), which is a tall tasks to ask for.

  3. AUFaninPA

    Cullen – thanks so much for having this site…I’ve learned more about the economy and how it functions from this site (and your book) in 3 months than I learned in 30 years of investing (technically saving).
    My issue with Hussman is, like many others in the financial industry, he thrives on fear. He makes money by increasing the amount people invest in his funds. Given his track record, the only reason to invest with him is that you think the market will be crashing soon. The more people he can scare, the more money flows into his funds, the more money he makes (whether or not the market does crash)

  4. Cullen Roche

    Thanks AU! It’s always great to hear that people are learning a lot from the site and the book. That’s been my main mission running this site. I have become disillusioned by the amount of misinformation in the finance/econ space these days. Not that I have all the answers, but I think we can do better.

    You read the book so you know my position on people who peddle fear. They’re just trying to separate a fool from their money. Of course, there are times for a more fearful perspective, but when you go almost an entire business cycle being bearish then your model has a low probability of working.

    I don’t know what’s happened to Hussman. Super smart guy whose strategy has worked really well at times. It would make for a great Harvard Business School study….

  5. Geoff

    The Motley Fool article is a good one and just scratches the surface. Some of the crap that goes on, especially in the less transparent bond market, is crazy.

  6. Frederick

    Hussman’s problem is simple. He’s actually a permabear. He has become married to a bearish thesis. He’s always citing the clowns over at ZeroHedge in his research and falling for the “world is ending” trap.

    I remember when QE started and he said the dollar would collapse and Cullen wrote something saying he was dead wrong.

    A lot of people think he’s really smart, but I don’t know if he really is.

  7. Frederick

    Cullen, I also wanted to note something – it appears as though the implementation of Disqus has reduced the comment count, but has increased the quality of the comments. This looks like a great change in my opinion.

  8. TimeToPanic

    Hussman is not a permabear. That is a fact. His record is excellent, apart from one miss for good reasons in early 2009.
    Given that the current bubble is bigger than in 1929, a bearish view right now will reap rich rewards as the cycle completes with a few awful years.
    He really is smart.

  9. BA31

    Despite arguments to the contrary and other various rationalizations for Hussman’s under performance, I seriously doubt the mandate of his fund is to significantly lag a multi-year bull market. As Swedore points out, the fund can take a hedged position when the investment manager fears market conditions warrant such a posture. It does not mandate a constant hedged position, so at the minimum Hussman’s decision to maintain a hedged position in a raging bull market is a horrific miscalculation. Wrong is wrong, regardless of your IQ. Hussman has effectively lagged the market so bad that if he were fully invested during the next correction and took the brunt of the entire correction his fund would be no worse off than it is now.

    In terms of Swedore and his passive posse, it seems to me these cats are getting just little too big for their britches and engaging in a whole lot of chest bumping. This reminds me some of the other market cycles whereby the perceived winners of the cycle claimed to hold the holy grail only to find out there are no absolutes in this business, not even passive investing. Regardless how you feel about CAPE ratio’s, if the low returns over the next 7 to 10 years materialize as the CAPE predicts, Mr. Swedore et al, won’t be the cool kids at school anymore. One thing that is never in question is the insanity of the individual investor. They are not going to sit passively in the much coveted index ETF’s cranking out 1 or 2% a year for the next decade.

    It is not going to happen.

  10. BA31

    Oh yeah, you are doing incredible work Cullen, and for us regular readers we are very proud of you.

  11. Suvy

    I think the way to fix finance would be to simply add skin in the game. The problem is that there are people in the industry who do not suffer the consequences of their own actions. It’s morally wrong for people to make decisions while society bears the negative consequences of their decisions. We saw CEOs walk out with tens of million dollars in bonuses while their firms ended up in the ground. It doesn’t take a rocket scientist to figure out something’s horribly wrong and I don’t think it’s too crazy to ask for the captain of the ship to go down if the ship’s sinking.

  12. Suvy

    I don’t think you understand what a permabear is. A permabear isn’t someone who’s expecting a crash every minute. I’m a permabear and I think the S&P will probably hit 2,500 and I wouldn’t be surprised if it touched 3,000 before a crash. I think you’d be insane to short stocks in today’s world.

  13. John Daschbach

    The Housel piece was a good read. But I think of Brad DeLong’s great quote on only Smiles and Really Gifted People will dominate the income distribution going forward. The financial industry Housel is referring to is the Smiles industry. Many in my generation know this quite well watching our parents in their later years. My father found the financial industry to be full of quacks and forced himself to study asset management. But after he passed away, my mother entrusted everything to a very pleasant (big Smiles) financial advisor (and mostly his underlings). Nice meetings (conference room with leather and glass with a spectacular view of SF), nice glossy reports, it’s all very nice, lots of Smiles. Her accounts are relatively small in the SF Bay Area range and she is told she gets a discount on fees due to this. Even in her getting senile state she can go off on a $350 dentist bill (cleaning, X-rays, exam). The dentist visit probably took as much human effort as her account management but the account management is 150X more per year (median household income level) and she thinks nothing of this (it’s big on the Smiles). A Housel points out, she has always said, “I can’t understand savings/finance and I don’t want to. …. makes sure I have enough money to live on, that’s all that matters”. Including her being suckered on real estate transactions because she won’t use family connections it’s about $2 million waste over the 30 years since my father died.

    But she loves the smiles.

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