Economist and fund manager Dr. John Hussman is drawing a lot of criticism these days for the poor performance of his funds. It seems to be fair and the reason is simple and straightforward: He is having some rough years and his performance numbers look bad. These are the annualized performance numbers of the Hussman Strategic Growth Fund as of Dec. 31, 2012:
These numbers look bad, on doubt. He underperformed the market by more than 5% over the past 10 years. However, if we look at the 10-year performance numbers for the same fund for the lost decade from 2000 to 2009, Hussman was a hero:
For the first decade of the 2000s, Hussman Strategic Growth Fund outperformed the market by 8.5% a year. He successfully avoided deep loss in 2009. His fund lost 9% while the market lost 37%. To put this into a better perspective, a 9% loss needs just a gain of 10% to break even, but a 37% loss will need a gain of more than 58% to break even. Isn’t he a hero?
John Hussman certainly missed a lot of gains over the last three years. But he has been investing the same way over these years. The investing philosophy that made him a hero for the first decade of 2000s is exactly what makes him a bad investor for the last 10 years.
What is wrong?
Let’s see another example. Don Yacktman is regarded as one of the best fund managers of our time. These are his performance numbers as of Dec. 31, 2012:
Aren’t the performance numbers great? No wonder investors are pouring money into his funds. But how many people still remember that in the end of 1990s Don Yacktman was almost ousted from his own fund because he missed all the gains by not investing in technology stocks? His fund lost 90% of its assets under management due to redemptions. Who knew that it is the best time to get into his fund rather than exactly the opposite?
Just like John Hussman, the investing philosophy that made Don Yacktman a bad investor in the decade of 1990s is exactly the same philosophy that make Don Yacktman a hero today. The only difference is that things happened in opposite sequence for John Hussman and Don Yacktman.
The examples can go on and on. This is the annual performance of a great (really) investor’s performance for the years from 1960 to 1974. The investor lost 31% consecutively for two years during the market decline of 1973 and 1974:
|This Investor||Dow Jones|
For the three-year period ended Dec. 31, 1974, the investor lost 20% a year in average while Dow Jones index lost 7.6% a year. For the five-year period, he lost almost 10% a year while the Down Jones index lost only 1.2% a year. Guess who this investor is?
It is the great Charlie Munger!
So what is wrong? Is it because 3-year, 5-year, or even 10-year periods are not long enough? Even if we look at 10-year periods, John Hussman did look good for the first 10 years of 2000s. How can he suddenly become a bad investor in three short years?
The answer, we believe, is that when you look at the performance of an investor, fixed time periods such as 3-year, 5-year, or even 10-year can mislead investors badly. Even one good (or bad) year can make the 10-year performance numbers look good (or bad). No investing style can outperform market all the time. As one of our users said very well, every investing style has its own bear market.
Therefore, the best way to check an investor’s performance is not looking at his returns over fixed time periods. Rather, it is to check the performance numbers over complete market cycles. We should look at his returns in good years and bad. We should look at the numbers from market peak to peak, and from trough to trough.
These are the annual returns of S&P 500 from 1999 to 2012. It is safe to say that the years of 1999 and 2007 are market peaks, while the years of 2002 and 2008 are market troughs. The market is making new highs as of this writing; it is safe to say that the market is closer to peaks than troughs as of Dec. 31, 2012. See below:
|Year||S&P 500 Gain (%)||Peaks||Trough|
Now let’s calculate the performance data of John Hussman for market peak to peak and trough to trough. Because Hussman’s fund did not exist for 1999, we use 2000 as the start of the peak.
|Trough to Trough 2002 to 2008||6.0%||-1.4%|
|Peak to Peak*: 2000 to 2012||4.7%||1.7%|
|Peak to Peak: 2007 to 2012||-2.6%||2.2%|
Therefore, Hussman did well for the 2002 through 2008 market trough to trough. He also did well for the long term peak-to-peak years from 2000 to 2012. He did underperform from 2007 to 2012. But this might not be a complete cycle.
As usual, many fund investors focus on short-term performance or the lack of it. The best time to invest with a good investor is usually the time when he is having his own bear market.
We will apply this method of performance measurement to all the Gurus we track. We think it is a better way to compare performance.
What do you think?