Hussman shows a risk of 50-66% [US stock]market losses

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Bankai
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Bankai »

Yeah, FTSE100 is another one that's highly unlikely to ever mean-revert and catch up with the US. Mainly to do with the index being full of old economy companies (basically big oil, miners, banks & pharma, plus some supermarkets and housebuilders) which were/are/are about to be disrupted and hence unlikely to mean-revert themselves. Really unfortunate that the home bias in the UK is so strong as investors are just loosing massively ever since GFC. Just looking at the top 10 companies in FTSE vs SP500, which one would any sane person rather own?

ASTRAZENECA
UNILEVER
HSBC
DIAGEO
GLAXOSMITHKLINE
ROYAL DUTCH SHELL PLC 'A'
BP
ROYAL DUTCH SHELL PLC 'B'
BRITISH AMERICAN TOBACCO
RIO TINTO

vs.

Microsoft Corporation
Apple Inc.
Amazon.com Inc.
Alphabet Inc. Class A
Tesla Inc
Alphabet Inc. Class C
Facebook Inc. Class A
NVIDIA Corporation
Berkshire Hathaway Inc. Class B
JPMorgan Chase & Co.

There's not a single tech company in FTSE100 top 10 and the only ones I'd want to own are boring compounders Unilever and Diageo, while on the other hand I'd want all but Berkshire and JPMorgan from SP500 top 10.

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Seppia
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Seppia »

tangent:
you can't just casually not consider the dividends in your analysis, you should be looking at total return if you want to do the math right.
Anyway, I would be 100% more comfortable owing the FTSE100 top 10 vs the S&P top 10 over the next 20 years, and it's not close.

One element that is too often forgotten in my opinion is the mind: in practical terms there's probably a much higher chance of success in a slightly suboptimal strategy that you can stick to VS the best strategy possible that makes you paranoid.

Ie I would never be comfortable owning bitcoin or crypto, so I don't own any regardless of how much money I could make.
Or, I would be 100% ok (even happy) if I held Diageo and it dropped 30% VS owning Tesla, which has had multiple 10-20% drops on its way to a 182762163792369726193761378% return.
I know Diageo will always make money because they have very strong brands and they operate in a high margin environment that I understand, while Tesla is a money incinerator with a drug addict CEO who makes dick jokes that has added the value of Toyota + Volkswagen to its market cap in the last two weeks.

My approach has cost me a lot of money, but I really do not care.

I believe being index jihadists carries many of the same risks of blindly following any guru. Turning your brain off is never a good strategy with anything.

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Bankai
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Bankai »

Seppia wrote:
Sun Oct 31, 2021 7:40 am
tangent:
you can't just casually not consider the dividends in your analysis, you should be looking at total return if you want to do the math right.
You're right, but it's not like I'm pretending to have done any in-depth analysis or anything. Going back to FTSE100, the index is roughly where it was 21 years ago. Add to that 3.5% average dividend yield and deduct 2.8% average inflation and you're left with 0.7% real annual return, or c. 15% real total return after holding for 21 years... that's like one good quarter for NASDAQ. I don't know what dividend yield Greek/Spanish/Italian markets enjoyed over the last two decades, but I doubt it would offset massive declines experienced by the indexes considering their economies weren't exactly growing at a neck-breaking pace (from memory all are still below 2008 peak while Greece is back to 1990's size of GDP).
Seppia wrote:
Sun Oct 31, 2021 7:40 am
Anyway, I would be 100% more comfortable owing the FTSE100 top 10 vs the S&P top 10 over the next 20 years, and it's not close.
OK, but why? You singled out Diageo as a good company (full agreement here) and Tesla as an overpriced company. But that's cherry-picking the best one from one lot vs. the most expensive/risky one from the other lot. How about the other 18 - would you really rather own a bunch of dinosaurs plus an oversized bank rumored to move its HQ to China than some of the best internet-enabled businesses in the world? The version of reality where FTSE top 10 outperforms over the next 20 years would require some combination of the following: 1) no internet, 2) continuation of massive demand and subsidies for oil and failure of transition to renewables/nuclear, 3) cigarettes still being a thing and profitable, 4) massive inflation in commodities driving the profitability of miners and disregarding the well-established deflationary trends. Frankly, unlikely.

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Seppia
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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Seppia »

Sorry for the misunderstanding I didn't mean it as a snipe :oops:
Just that VERY often analysis omit the dividend part, and that's a huge part of the total return. Of course Italy/Greece are very clear examples of why one should NOT concentrate all his/her holdings in one country (even if it's the USA in my opinion), I'm not at all in disagreement.

As to why I'd prefer most of the FTSE100, I could be wrong but here's my view of each of them:

ASTRAZENECA Pharma, boring money making machines
UNILEVER Great brands, I like the idea of consumer staples as a stable/predictable source of earnings
HSBC This one I am not sure I like
DIAGEO See unilever, only with even stronger brands and higher margins
GLAXOSMITHKLINE See Astrazeneca
ROYAL DUTCH SHELL PLC 'A' I am starting to think fossils are going to be in the next 20 years what tobacco was in the last 20. Declining volumes, but cash machines.
BP See RDSA
ROYAL DUTCH SHELL PLC 'B' See RDSA
BRITISH AMERICAN TOBACCO This company comfortably pays and 8.4% dividend with a payout ratio of 78%. It has a lot of debt (45b) but has an ebitda of 12b on 25b in sales. They sell some of the most inelastic goods one can find. Dwindling demand, but profits have been raising faster than the volumes drop. No new brands are entering the field as advertisement is prohibited almost everywhere. This business will be dead in 100 years, but one breaks even with the dividends in 10.
RIO TINTO Low debt commodity producer with very little debt. Spoiler alert: we will need to continue digging stuff out the ground

For the record, I own RDSB, BATS, GSK and Rio Tinto. The first two are my number 1 and 2 sigle stock holdings, GSK is number 5.

Microsoft Corporation: Fantastic company, priced for perfection
Apple Inc.: Fantastic company, priced for perfection
Amazon.com Inc.: Fantastic company, almost priced for perfection, but one I'd consider buying today
Alphabet Inc. Class A: Fantastic company, priced for perfection, but one I'd consider buying today
Tesla Inc: Shit company, priced by someone on LSD
Alphabet Inc. Class C: Fantastic company, priced for perfection, but one I'd consider buying today
Facebook Inc. Class A: shit company that is a net negative for humanity. The Meta renaming reeks of desperation. They're dead and they know it.
NVIDIA Corporation: Let's see what happens if/when crypto comes back to earth
Berkshire Hathaway Inc. Class B Fantastic company, would like to own
JPMorgan Chase & Co.: The best bank probably in the USA together with GS

In summary: top 10 in the usa is generally populated by great companies (TSLA and FB the two exceptions), but a lot of things have to go right for them to justify their valuation long term.

Of course the above is my opinion and can prove to be spectacularly wrong, which is why I own around 40% of Indexes and why I diversify a lot (across sectors, countries) even in my single stock holdings

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Scott 2 »

steveo73 wrote:
Sat Oct 30, 2021 10:38 pm
I don't want to make out that being different works better. It's sub optimal.
Since you mentioned JL Collins - I am curious, where do you draw the line between smart indexing and sub-optimal active investing? From what I recall of his advice, it rules out almost any complexity.


Examples:

1. Would you account for factors like size and risk, maybe by taking a small/value tilt to your indexed portfolio?

2. Would you let your asset allocation drift for awhile, to take advantage of momentum as a factor?

3. Would you consider a rising equities glide path, to mitigate sequence of returns risk, when retiring into a high valuation environment?

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by LetsRetireYoung »

Bankai wrote:
Sun Oct 31, 2021 5:25 am
Japan is not the only example of a single country stock market doing extremely poorly over 2+ decades - consider the less known disasters in developed markets of Southern Europe. Greece is an especially sobering case with a nominal return of -84.5% since 1999 and the real return likely over -90%. Will Greece ever mean revert? Considering it would require its stock market to go up by an order of magnitude, I'd not hold my breath it will happen in my lifetime.
You are correct that there have been a few economies that went stagnant for long stretches of time. However, there's a key difference here: none of those countries controlled the world's reserve currency.

Dr Michael Burry (you know, the Big Short guy?) in particular is a giant perma-bear, and he thinks he knows history... The guy won't shut up about Weimar Germany, but what he utterly fails to understand is that Weimar Germany never controlled the world's economy. Weimar Germany, and Greece, and Japan, and others may have been powerful, but they were never that powerful.

Failing to consider who actually held the power at the time is missing the forest for the trees. It reminds me a lot of really well-intentioned and otherwise smart people who guffaw and wonder why there's so much more obesity now than in the 19th century, while not realizing that back then, most jobs were either in agriculture or in factories, with very long workdays and no vacations, and everything was extremely physical. They have the right idea (i.e., something really major has changed) but they completely fail to understand the full context. ¯\_(ツ)_/¯

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by LetsRetireYoung »

Seppia wrote:
Sun Oct 31, 2021 7:40 am
I know Diageo will always make money because they have very strong brands and they operate in a high margin environment that I understand, while Tesla is a money incinerator with a drug addict CEO who makes dick jokes that has added the value of Toyota + Volkswagen to its market cap in the last two weeks.

My approach has cost me a lot of money, but I really do not care.
That is brilliant. :lol: Thank you for articulating my exact concerns with that strange, strange stock.

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by steveo73 »

Scott 2 wrote:
Sun Oct 31, 2021 9:55 am
Since you mentioned JL Collins - I am curious, where do you draw the line between smart indexing and sub-optimal active investing? From what I recall of his advice, it rules out almost any complexity.


Examples:

1. Would you account for factors like size and risk, maybe by taking a small/value tilt to your indexed portfolio?

2. Would you let your asset allocation drift for awhile, to take advantage of momentum as a factor?

3. Would you consider a rising equities glide path, to mitigate sequence of returns risk, when retiring into a high valuation environment?

I think that there is a lot of leeway so long as you stick to modern portfolio theory - a diversified portfolio made up of index funds. You get to make the choice of your portfolio based on your risk portfolio.

To answer your questions directly:-

1. I wouldn't do point 1. My opinion is that you want as broad a stock index as possible. I think the optimal approach is a world tracker. I don't view the suggestion in point 1 as really poor investing but I wouldn't do it.
2. Yep but not based on momentum. I don't really believe in re-balancing your portfolio, Refer to the point below.
3. I think a rising equities glide path makes sense in general. I'm not a big fan of stating what is a high valuation environment. Sure there may be some limits but this thread is a classic example of why I personally don't play that game.

I suppose my big issue is when people state things like indexing is for the average investor or something like that. They are trying to make out they know better and will perform better. The reality is they are taking a sub-optimal approach and they will more than likely be an under performer compared to the index investor. This thread is an example of this.

Like I said earlier it depends what your goal is. If your goal is to create an investment portfolio that will fund your financial requirements over the course of your life the most efficient/optimized approach is setting up a portfolio and using index funds. I believe you need a high stock percentage within your portfolio.

People though have different goals even if they don't actually know that. This is why I state know yourself. If you aren't indexing and using portfolio management then you either have some other goal which you should be able to articulate or you are not educated on investing or you are deluding yourself.

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by steveo73 »

Seppia wrote:
Sun Oct 31, 2021 7:40 am
I believe being index jihadists carries many of the same risks of blindly following any guru. Turning your brain off is never a good strategy with anything.
Agreed. There may come a time when indexing isn't the optimum approach but at this point it's hard to see why this would occur let alone when.

I think the big take out is that if you aren't indexing then you aren't being efficient. This thread is a classic example of why indexing and portfolio management works so well assuming you stick to the plan.

Maybe a good question is why would indexing not work so well ? You have to be careful here as well because you don't want to get caught up in the I'm so smart even though I'm making really really bad financial decisions outlook.

One last point I think index investing and portfolio management will work for a really long time because of threads like this one. People don't invest in the most optimum fashion because they have different goals other than optimizing their financial assets. That goal can be as I want to appear smart ala Hussman. Maybe Hussman doesn't even believe the stuff he posts but it makes him money but people do fall for this stuff. It's human nature. I'm more of a Vulcan. The markets crashed over COVID and it didn't bother me a bit.

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Scott 2 »

@steveo73 - Makes sense. For the most part, I find when you dig into an educated investor's perspective, views aren't that different. The hard part is figuring out if someone is blindly parroting a set of rules, or has more thoroughly considered their position.

For me personally, after extensive consideration, I am running a basic 4 fund portfolio. I let my asset allocation ride and use a rising equities glide path. I know I am leaving money on the table and have accounted for it in my SWR.

I believe accounting for known factors like size and value can bring a portfolio closer to the efficient frontier. However, in practice, I was not willing to implement such a strategy. I was not confident in how I, or my wife, would handle the tracking error. I also felt it was too much complexity for my wife to take over, should something happen to me.

There was also the practical consideration of - do I understand what I am investing in? When I started to look at assets like REITs and emerging markets, the answer was clearly no. Maybe the math shows it makes for a superior portfolio, but it was hard to be confident in something I don't understand. I wasn't willing to do the work to educate myself.


My biggest investing mistake was blindly buying target retirement funds in all accounts, ignoring the tax consequences. I did hold a high percentage of cash for much of 2018-2020, but do not regret it. I was knowingly buying insulation from high volatility, at the expense of lower returns during that time. It served me psychologically when March 2020 hit, though I know my strategy did not provide maximal returns.


Because I do believe a portfolio can be constructed to account for known factors, beyond just market risk, I am open to the idea that constructing a portfolio from individual stocks may offer greater returns. However - I think it is the exceptional investor who can resist temptation to speculate under such conditions. From the outside, differentiating between a reasoned investor and fortunate speculator is nearly impossible. Such portfolio construction also carries a commitment to significantly more work than I personally am willing to take on.

For what it is worth, I believe Jacob fits the profile of a reasoned investor. PhD in physics, investing as a long term interest, good at taking a coldly rational approach to problems, experience working in an investment firm, etc. However, I also believe his earlier work over-estimates the availability of those traits in others.

I've interpreted his later work as promoting consideration of ideas like I asked about above, as a starting point. Indexing is a broad umbrella. I think it's reasonable to suggest people look beyond their allocation of VTI vs. BND.


I think this thread has picked up some people early in their investing journey. I'd point them to Tyler's excellent site, for starting to visualize the world beyond VTI forever or "I like the stock":

https://portfoliocharts.com/

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by steveo73 »

Scott 2 wrote:
Sun Oct 31, 2021 5:47 pm
Because I do believe a portfolio can be constructed to account for known factors, beyond just market risk, I am open to the idea that constructing a portfolio from individual stocks may offer greater returns. However - I think it is the exceptional investor who can resist temptation to speculate under such conditions. From the outside, differentiating between a reasoned investor and fortunate speculator is nearly impossible. Such portfolio construction also carries a commitment to significantly more work than I personally am willing to take on.

For what it is worth, I believe Jacob fits the profile of a reasoned investor. PhD in physics, investing as a long term interest, good at taking a coldly rational approach to problems, experience working in an investment firm, etc. However, I also believe his earlier work over-estimates the availability of those traits in others.
That was a really good post. Thank You.

I agree with your basic premise except for most of this part. It's not about Jacob, It's about rational portfolio management. Active investing is a great way to under perform.

I should add that I mentioned this earlier but I'll state it again because to me it's a key point. I love index investing because it's lazy. You don't have to work hard and you will outperform the people who work hard and think they can win the game. Investing is one of those rare fields where working harder and longer doesn't help you. I think if anything it hurts you.
Scott 2 wrote:
Sun Oct 31, 2021 5:47 pm
I've interpreted his later work as promoting consideration of ideas like I asked about above, as a starting point. Indexing is a broad umbrella. I think it's reasonable to suggest people look beyond their allocation of VTI vs. BND.
I'm not sure what Jacob would state today but I suppose it doesn't matter. I suppose this thread and Jacob's previous talk about index investing not being that great leads to an impression that today Jacob would still try and pick the market. So we are setting Jacob up as the irrational investor who jumps at shadows and invests sub optimally. His opinion today may be completely different to what it was in the past.

I listened to that recent podcast and I think Jacob was stating to think for yourself. I think he even mentioned that now he may invest into index funds. I suppose my only amendment to Jacobs point on thinking it to not delude yourself that you are the guy who is going to be win via active investing. You aren't the guy.

I think the key point though in the context of this thread is to never trust the guru. Hussman or Jacob or whoever. When they start telling you to do things that goes against the data then you should run away and do it as quickly as possible.
Scott 2 wrote:
Sun Oct 31, 2021 5:47 pm
I think this thread has picked up some people early in their investing journey. I'd point them to Tyler's excellent site, for starting to visualize the world beyond VTI forever or "I like the stock":

https://portfoliocharts.com/
This is the right stuff to discuss. This is where the nuance should be.

I should add that I have individual stocks that I retain despite thinking it's stupid. I have them because I worked for that company and I was gifted those shares. I won't sell them because there will be a capital gains tax. In stating that now that I'm not working and therefore my income is really low I will sell off those shares when it's time to sell shares. They will be the first to go.

So I have:-

1. Bonds (a small amount) and cash (this isn't small at the moment). I should be able to last at least 5 years off this money. I'm 1 year into my retirement now. This is my SORR funds.
2. Local domiciled stocks. This is irrational to me but I get tax benefits in relation to dividend payments and the dividend payments are great.
3. Work trackers. This is the good stuff that I rely on to power my portfolio.

My point is that I can understand having individual stocks because of legacy issues. I don't understand stating that this is most efficient way to invest. It's just not. It's a slap in the face to the data/facts.

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by white belt »

Chapter 7 in Reilly and Brown's Investment Analysis and Portfolio Management has a succinct breakdown of considerations on active vs passive management that I think is relevant to this discussion:
Reilly and Brown 250 wrote: A portfolio manager with access to superior analysts who have unique insights and analytical ability should follow their recommendations. The superior analysts should make investment recommendations for a certain proportion of the portfolio, and the portfolio manager should ensure that the risk preferences of the client are maintained.
Reilly and Brown 251 wrote: In summary, if you do not have access to superior analysts, you should do the following:

1. Determine and quantify your risk preferences.
2. Construct the appropriate risk-level portfolio by dividing the total portfolio between lending or borrowing risk-free assets and a portfolio of risky assets.
3. Diversify completely on a global basis to eliminate all unsystematic risk.
4. Maintain the specified risk level by rebalancing when necessary.
5. Minimize taxes and total transaction costs.

A lot of the disagreement in this thread seems stem from whether it is possible for the typical ERE person (or any person), to serve in the role of superior analyst. Some argue that it is not possible while others argue that it is possible with the right education, temperament, experience, etc. Another form of this argument is whether EMH is absolutely true in all cases vs whether there are some cases where it is not true in which arbitrage is possible.

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by steveo73 »

white belt wrote:
Tue Nov 09, 2021 7:01 pm
A lot of the disagreement in this thread seems stem from whether it is possible for the typical ERE person (or any person), to serve in the role of superior analyst. Some argue that it is not possible while others argue that it is possible with the right education, temperament, experience, etc. Another form of this argument is whether EMH is absolutely true in all cases vs whether there are some cases where it is not true in which arbitrage is possible.
This is a pretty fair summary of the discussion but I think it requires a bit more nuance. In my opinion it has nothing at all to do with the EMH and the textbook explanation is pretty poor.

It's best to cover these points first:-

1. The idea that EMH is absolutely true in all cases or is arbitrage possible to me is an attempt to frame the discussion in terms that don't apply to investors basically at all. Of course the market isn't always efficient. This has nothing to do with beating the market over the long term. People will punt on all sorts of things and make money hand over foot. Bitcoin/Crypto is a classic example.
2. The idea of the superior analyst or special investor who has the right education, temperament, experience, smarts, whatever. This is the idea that there is the super investor out there and it's a really poor way to view the markets and investing. The problem with this approach is that it gives people an out who want to bet against the data. They believe they are different. There are somehow smarter or better than the average investor. It appeals to people who are the opposite to humble and these people are going to make investing mistakes.

To me it's really simple. It's impossible to pick an active portfolio and consistently beat the market over the course of your investing life. If you do it's a fluke. Never trust people who state that they are that person as well. Show me the data and do it prior to telling everyone how much money you've made. I don't know if you've met any superior investors (I have) and from what I can see they get a hot hand and make money but they also get cold hands. I think it's hilarious to think that you are a superior investor and you aren't at bare minimum a multi-multi millionaire and even then I'm skeptical because it's very different running a hedge fund for instance compared to managing your own finances over the course of your life. I'm not even sure you could call it investing. It's punting.

As smart rational investors we need to look objectively at the facts. You'd have to be a fool to believe your special trading approach is going to beat the market.

If you aren't a fool and you are an active investor and you are educated on finances then my assumption is you are investing for different purposes. For instance I have extended family who are Muslims (and pretty strict). They cannot borrow money to buy a house and they won't invest in any company that makes money from usury. They can't invest into index funds because it goes against their religion. You may not want to invest into drug or petroleum companies. You may just like to invest partially for fun. The guy I know who is a superior investor wouldn't use index funds because to him it's all about taking a punt and because he has so many assets he can punt big and hold long term. He is also really wealthy so getting the best possible risk adjusted return just isn't what he is after. There is no way I would give him money to invest because my index funds on a risk adjusted basis are more than likely going to kill his returns.

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by white belt »

steveo73 wrote:
Tue Nov 09, 2021 8:38 pm
If you aren't a fool and you are an active investor and you are educated on finances then my assumption is you are investing for different purposes.
Yes, this is what others have been getting at in this thread. Not everyone is playing the same game. For example, if an index drops by 50% and my portfolio along with it, well at least my performance is tracking the index! I'm not sure that's a victory; maybe I'd rather invest so that if the index drops 50%, my purchasing power stays the same or only drops by a few percent?

Risk/return appetite changes over time for individuals. Some people are looking for multi-bagger returns (high risk/reward) and then will transition to something much more conservative once they've accumulated a lot of money. Taleb's barbell approach is an attempt to do this as an entire portfolio. Jacob talks about how he is considering just going into TIPS to reduce risk because he doesn't need high reward anymore.

I guess I take issue because there is no one-size-fits-all solution when it comes to investing and I feel like passive index investing is being presented as exactly that. If active investing is a great way to underperform, then passive investing is a great way to perform exactly like the market does (so you better hope the market continues going up and stays up at the exact time you need your money!). I'm sure there are a lot of investors in Japan and some developing countries that would laugh at such an assumption.

Based on the posts you've made in this thread and others, it seems that your assumption is that more financial capital is always better. What if you had more money than you could ever spend? Would you still have the same investing views?

Edit: After re-reading your posts up the page, I think we are mostly in agreement.

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Scott 2 »

In practice, I agree with @steveo73 - I personally chose a relatively simple passive investing strategy. I think it suits most, especially those unwilling to do the work or educate themselves. But, I did find it helpful to understand why I was choosing it, and what I was leaving on the table by doing so.

Some related thoughts:


Equities analyst is an entry level position. The 22 year old with a freshly minted bachelor's doesn't have magic powers. I read the reference to a "superior analyst" as a nod to insider trading. Part of the reason I think individual stock investing can be an uphill battle, is I am certain there is information asymmetry. Getting on the winning side requires relationships I don't have.


The idea of "buy the index" or "own the market" first confused me and now annoys me. What index? What market? What are we comparing performance to? Also - how are we owning it? If a company moves out of the S&P500, what does the fund do? What happens in my small value index fund, when a company grows out of category? When does it sell that winner?

These are all answerable questions, but early in my investing, I didn't even know to ask them.

I think the root problem is people communicating about nuanced ideas with overly coarse language. Start introducing beta, alpha, sharpe ratios, etc. Then the conversations become more reasoned. However, you are counting on everyone having a similar understanding of portfolio theory. Not reliable, IMO.


Similarly - active and passive are broad umbrellas. Basic investing material presents them as a binary choice, but that is not the case. Opposite ends of a spectrum gets closer, but still denies the underlying complexity.

If a fund does not track an index, but a screen and strategy are defined in the prospectus, is it passive? I'd say yes. What if an individual does the same thing, but buys the stocks themselves? No?

Something like this blurs the line, IMO:

https://prospectus-express.broadridge.c ... =233203611
The Emerging Markets Small Cap Portfolio pursues its investment objective by investing substantially all of its assets in the Emerging Markets Small Cap Series. The Series purchases a broad market coverage of smaller companies associated with emerging markets, which may include frontier markets (emerging market countries in an earlier stage of development), authorized for investment by the Advisor’s Investment Committee (“Approved Markets”). The Advisor’s definition of small varies across countries and is based primarily on market capitalization. A company’s market capitalization is the number of its shares outstanding times its price per share. In each country authorized for investment, the Advisor first ranks eligible companies listed on selected exchanges based on the companies’ market capitalizations. The Advisor then defines the maximum market capitalization for a small company in that country. For example, based on market capitalization data as of December 31, 2020, Mexico had a size threshold of below $4,750 million, and Greece had a size threshold of below $893 million. These thresholds will change due to market conditions. The Advisor may also adjust the representation in the Series of an eligible company, or exclude a company, after considering such factors as free float, momentum, trading strategies, liquidity, relative price, profitability, investment characteristics, and other factors that the Advisor determines to be appropriate. An equity issuer is considered to have a low relative price (i.e., a value stock) primarily because it has a low price in relation to its book value. In assessing relative price, the Advisor may consider additional factors such

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Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Bankai »

Scott 2 wrote:
Wed Nov 10, 2021 12:26 pm
The idea of "buy the index" or "own the market" first confused me and now annoys me. What index? What market?
Yup. People who think they are investing passively because they bought the S&P500 index still made plenty of active decisions:
- choosing publicly trading equities of all the available asset classes
- choosing a particular country/home bias
- choosing a particular index

On top of that, SP500 itself is quite the opposite of 'passive'; it's a self-cleansing index that buys and sells based on specific criteria.

There's not a single truly passive investor in the world because the holy grail of passive investing would be to own a single product offering appropriately weighted exposure (and rebalancing) to all the asset classes available globally, such as:
- global equities
- private equity
- commodities
- government bonds
- corporate bonds
- infrastructure
- real estate
- cryptos
etc. etc.

I'm not aware of a product like that - perhaps there are some hedge funds trying to do that but they probably charge the typical 2+20 so not a good deal, plus there's still a manager making the decision.

WFJ
Posts: 416
Joined: Sat Apr 24, 2021 11:32 am

Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by WFJ »

Some interesting points about the passive vs. active perspective. In my wide experience in the world of finance and stats, there are very few investors who can "Beat the Market" (blind S&P 500 index or al US market weighted index) and the few that can beat the market can only do this for short time periods. "Beat the Dealer" is a good template to understand that the market and blackjack experience regime switching and provide opportunities for abnormal profits, but are fleeting and temporary. Written by Edward Thorpe who later used a similar template to Beat the Market.

From an ERE perspective, one needs to estimate the cost of spending time to become an "expert" in investing relative to other employment opportunities or building self reliant skills in another area and just blindly following the index. I also estimate that one will also need to have a minimum of $1,000,000 to justify any time investment to make any small abnormal returns above the index to be worth the time. At that AUM, an ERE can most likely retire and not work for the rest of their lives, so there is no point in seeking abnormal profit from markets at that point. The markets can be fun and engage a different part of your brain than most employment opportunities, but unlikely to result in abnormal returns above blind indexes.

I am experimenting with direct indexing as I do believe there are several companies who are building sand castles to the moon and wasting capital on their CEO's metaverse dreams, but still a passive indexer excluding a few members of the S&P 500 and Nasdaq. From a moral perspective, it also bothers me how some of these companies are using capital, but this is not to maximize returns, it just pisses me off and worth the cost of a few basis points. Majority of holdings are still VOO and similar but expanding direct indexing to 50% of portfolio. My only investing talent is to avoid losing money, my best relative years were 2020, 2007-2008 and 2000-2001, where I usually match the market in normal years and mostly due to luck, outperform market during sell-offs (protective puts, avoid high flyers as much as possible).

WFJ
Posts: 416
Joined: Sat Apr 24, 2021 11:32 am

Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by WFJ »

Bankai wrote:
Wed Nov 10, 2021 1:39 pm
Yup. People who think they are investing passively because they bought the S&P500 index still made plenty of active decisions:
- choosing publicly trading equities of all the available asset classes
- choosing a particular country/home bias
- choosing a particular index

On top of that, SP500 itself is quite the opposite of 'passive'; it's a self-cleansing index that buys and sells based on specific criteria.

There's not a single truly passive investor in the world because the holy grail of passive investing would be to own a single product offering appropriately weighted exposure (and rebalancing) to all the asset classes available globally, such as:
- global equities
- private equity
- commodities
- government bonds
- corporate bonds
- infrastructure
- real estate
- cryptos
etc. etc.

I'm not aware of a product like that - perhaps there are some hedge funds trying to do that but they probably charge the typical 2+20 so not a good deal, plus there's still a manager making the decision.


You are describing the "Roll Critique" that it is nearly impossible to capture "The Market" as typically the most important asset for each individual is their own human capital.

Campitor
Posts: 1227
Joined: Thu Aug 20, 2015 11:49 am

Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by Campitor »

Campitor wrote:
Thu Mar 11, 2021 6:06 pm
When governments can mandate rent-free living during a pandemic or contemplate taxing unrealized gains, no investment strategy is safe/superior. Index funds will always be popular because most people are unwilling to learn how to invest wisely. And when actively managed funds can't beat the index long-term, and most people saving for retirement are long term investors, S&P500 index funds will continue to be popular even when the market drops because the average consumer wouldn't even know how or where to reallocate funds. And in a scenario where the S&P500 tanks, there will be very few actively managed funds that will not suffer any significant losses.

steveo73
Posts: 1733
Joined: Sat Jul 06, 2013 6:52 pm

Re: Hussman shows a risk of 50-66% [US stock]market losses

Post by steveo73 »

Campitor wrote:
Thu Nov 11, 2021 9:15 am
Index funds will always be popular because most people are unwilling to learn how to invest wisely.
I agree with basically all the posts above except this little point. No offence to @campitor.

I view the situation completely opposite to you. I'm cool with people trying to beat the market as well. I welcome it. Investing wisely means using index funds. The people that aren't doing that are why I will outperform the average investor. That is what makes investing great.

I'm loath to state what is the right approach however I posted my approach and reason why. People will like different portfolios. That is where the educated smart investors invest.

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