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Josh Brown: When The Hedge Is Worse Than The Thing Being Hedged; Black Swans & John Hussman
"The future is uncertain, so investors should always think in terms of probabilities, never guarantees. What this data tells me is that the longer your time horizon, the higher your probability of seeing a gain in the stock market."
That's not me writing. It's a quote from an article by Ben Carlson. Here is the Link to that article that summarizes market returns winning statistics:
Not much has changed statistically since this article was published. It's a simple matter of just playing the odds. That's always a good strategy.
The equity marketplace is up 54% of the time on a daily basis. It is up 74% of the time annually. As the investment timeframe expands, the winning statistics keep increasing. In the investment world, time is your ally. Once again simplicity trumps complexity.
"Here’s another beauty, also at the Journal, about a fund manager who is currently in a 52% drawdown from the peak and still has the chutzpah to be lecturing others ... "
Grandma stashing her savings in a cookie jar over the past decade would be ahead of this renowned investor.
Rule# 1: "Don't lose money." (Perhaps not applicable in the world of sophisticated investing?)
If the future is truly uncertain, why should investors have a long bias in their portfolios? All we know is that in the past this strategy has worked, not that it will work in the future. Applying some blind probability analysis based on that past performance without asking why that performance occurred denies the existence of that uncertainty. Investors need to figure out if the same assumptions that drove stocks up in the past still apply today and will continue to drive them up in the future.
Among those assumptions--1. the continued dominance of America's largest publicly traded multinational corporations 2. If yes to one, a fair or cheap price paid for a piece of that dominance, i.e., valuation 3. strong or moderate macroeconomic conditions--low or falling interest rates, modest inflation, decent GDP growth, employment 4. stable or improving geopolitical conditions--no populist outrage, favorable tax rates, no losing side of wars, no cataclysmic climate disasters, zombie apocalypses, etc.
All of these complex variables factor into the analysis into the ongoing might of the U.S. market. Rather than just empty performance numbers, real human history is what needs to be studied, having an awareness that the emergence of America as the dominant global economic superpower in the last 100 years is actually a rather unusual thing, which is by no means assured in the future. Even more unusual is the rise of the modern multinational corporation--a relatively new thing historically. Who's to really say how long the good times for stocks will last?
I think LB makes a good case for holding cash or high quality bonds along with equities.
But, holding short equity positions is inherently hazardous. (Theoretically, a stock can continue to rise forever.) It boils down to the skill of the manager to effectively implement a short selling strategy - and avoid losing his shirt in the process. Not to say using short positions to hedge equity risk is a bad approach - just that John Hussman hasn't demonstrated the capacity to execute the approach effectively. And, while he somewhat vehemently denies shorting equities, Hussman's HSGFX often behaves as if (effectively) short the market.
Alternatives like gold, foreign currencies, commodities, real estate, etc. constitute another form of hedging. Personally, I like to keep a small hold in funds which include those types of assets. I fully recognize that that dilutes my returns as compared to being invested only in equities. Much disagreement exists on the board re the subject - and I've no desire to become a spokesman for PRPFX or any other fund investing in such alternatives.
BTW: The brains at TRP have held for several years now that we're in the midst of a cyclical bear market in commodities. They would probably say that we're in the 5th or 6th inning. While I've disagreed a bit with that bearish outlook, I suspect they're mostly correct in the call. It's relevant here only in that commodities are often viewed as an alternative investment to equities.
Yes. Agree with LB that equity markets don't always rise. They can (and do) experience significant multi-year periods of negative performance. And I fear very much that our instant-touch media (24-hour financial reporting and internet access) have magnified the always present human herd instinct. If correct, that implies both stronger bull markets and worse bear markets ahead than have occurred historically.
Comments
"The future is uncertain, so investors should always think in terms of probabilities, never guarantees. What this data tells me is that the longer your time horizon, the higher your probability of seeing a gain in the stock market."
That's not me writing. It's a quote from an article by Ben Carlson. Here is the Link to that article that summarizes market returns winning statistics:
http://awealthofcommonsense.com/2015/11/playing-the-probabilities/
Not much has changed statistically since this article was published. It's a simple matter of just playing the odds. That's always a good strategy.
The equity marketplace is up 54% of the time on a daily basis. It is up 74% of the time annually. As the investment timeframe expands, the winning statistics keep increasing. In the investment world, time is your ally. Once again simplicity trumps complexity.
Best Wishes
Grandma stashing her savings in a cookie jar over the past decade would be ahead of this renowned investor.
Rule# 1: "Don't lose money." (Perhaps not applicable in the world of sophisticated investing?)
Among those assumptions--1. the continued dominance of America's largest publicly traded multinational corporations 2. If yes to one, a fair or cheap price paid for a piece of that dominance, i.e., valuation 3. strong or moderate macroeconomic conditions--low or falling interest rates, modest inflation, decent GDP growth, employment 4. stable or improving geopolitical conditions--no populist outrage, favorable tax rates, no losing side of wars, no cataclysmic climate disasters, zombie apocalypses, etc.
All of these complex variables factor into the analysis into the ongoing might of the U.S. market. Rather than just empty performance numbers, real human history is what needs to be studied, having an awareness that the emergence of America as the dominant global economic superpower in the last 100 years is actually a rather unusual thing, which is by no means assured in the future. Even more unusual is the rise of the modern multinational corporation--a relatively new thing historically. Who's to really say how long the good times for stocks will last?
But, holding short equity positions is inherently hazardous. (Theoretically, a stock can continue to rise forever.) It boils down to the skill of the manager to effectively implement a short selling strategy - and avoid losing his shirt in the process. Not to say using short positions to hedge equity risk is a bad approach - just that John Hussman hasn't demonstrated the capacity to execute the approach effectively. And, while he somewhat vehemently denies shorting equities, Hussman's HSGFX often behaves as if (effectively) short the market.
Alternatives like gold, foreign currencies, commodities, real estate, etc. constitute another form of hedging. Personally, I like to keep a small hold in funds which include those types of assets. I fully recognize that that dilutes my returns as compared to being invested only in equities. Much disagreement exists on the board re the subject - and I've no desire to become a spokesman for PRPFX or any other fund investing in such alternatives.
BTW: The brains at TRP have held for several years now that we're in the midst of a cyclical bear market in commodities. They would probably say that we're in the 5th or 6th inning. While I've disagreed a bit with that bearish outlook, I suspect they're mostly correct in the call. It's relevant here only in that commodities are often viewed as an alternative investment to equities.
Yes. Agree with LB that equity markets don't always rise. They can (and do) experience significant multi-year periods of negative performance. And I fear very much that our instant-touch media (24-hour financial reporting and internet access) have magnified the always present human herd instinct. If correct, that implies both stronger bull markets and worse bear markets ahead than have occurred historically.