Hussman Weekly Market Comment: Defensive, With a Measure of Equanimity

Probably my clearest drawback as an investment manager is that I have too often assumed that investors should recognize what seemed to me to be patently obvious dangers (the predictable collapse of the dot-com bubble, the tech bubble, the housing bubble, the oil and commodities bubble, etc) with a longer lead-time. Unfortunately, we inevitably experience a period of frustration – at least temporarily – for assuming such foresight. Still, none of those has caused trouble for us like they did for the rest of the world. Sustainable long-term returns require the avoidance of major losses, and the best way to avoid major losses is to avoid a) securities where the probable long-term cash flows do not justify the price, and b) markets where the probable returns from accepting risk are unlikely to be durable. There are a lot of investments that can be bought for short-term speculation that fail this test, but advance anyway - until they don't. The most important lesson I keep having to re-learn is how utterly myopic investors can be when there's an uptrend to be played.

Since I have no plans to risk the financial security of our shareholders on securities that are not worth their price, or premises that I believe are dangerously false or irrational, I can't say that learning this lesson will make us strikingly more responsive to speculative runs in the future. But there may be some middle ground that we can exploit. Our objective remains constant: to significantly outperform our benchmarks over the complete bull/bear market cycle, with smaller periodic losses than experienced by a passive buy-and-hold strategy.