As the market likely concludes 2010 with double digits returns, investors, professionals and individuals alike, would naturally ask themselves this question: “How did I do in 2010 compared with the market?”
We are having a poll here for the performance of our users. As we can see:
60% of the users who responded have beaten the S&P500! Congratulations! I hope that GuruFocus strategies have contributed to your outperformance, as they did for some of our subscribers. It is certainly good news for individual investors to see their portfolio grew more than the market average. It is great news for professionals as better performance numbers mean more things to say to the shareholders and investors, more publicity. That leads to more money under management, and more fees…
While it is a good thing if you beat the market, but we would like to ask you some questions. How did you achieve this? Have you done this by taking more risks? Or less risks? Are you aware of the risk levels in the stock market now? Do you know the possible outcomes with this level of market risks?
As I wrote in the previous article The Myth of Beating the Market, beating the market is NOT about more gains in a day, a month, or even a year. It is about beating the market in a full market cycle, that is, the market goes through at least a trough and a peak and back to its original level of valuations. If you come out with more gains after a complete cycle, you beat the market!
Here a good example I like to use is the performance of Dr. John Hussman’s Strategic Growth Fund. The fund has been underperforming significantly since the market recovers in 2009. It gained only 4.63% in 2009, and close to flat this year, while market is delivering double digits returns. But from year 2003 to 2008, while the market made a complete cycle, Hussman Strategic Growth Fund gained 32%, doubled the market’s gain of 16%. Interestingly, the fund underperformed three out of the six years from 2003 to 2008. The fund gained more during the complete market cycle not by gaining more all the time, but by losing much lessin 2008, when the market risk is at the level that will deliver poor future returns.
This is the performance of Hussman Strategic Growth Fund from 2003 to 2008:
John Hussman’s fund has been underperforming again in the last two years. He has been fully hedged, and missed most of the gains over the past two years. We are yet to see the outcome for the current market cycle, which we don’t when it will finish.
So where are we will market risks?
We measure the market with the ratio of total market cap over GNP, which is the “single most important indicator” claimed by Warren Buffett. As measured with this ratio, the market valuation is at the similar level as it was in 2004, which is modestly overvalued. The market did go on with another three positive years, delivered a total gain of about 30%, and to terribly overvalued regime. Then we all know what happened afterwards.
This is the ratio total market cap over GNP:
We are having a poll here for the performance of our users. As we can see:
60% of the users who responded have beaten the S&P500! Congratulations! I hope that GuruFocus strategies have contributed to your outperformance, as they did for some of our subscribers. It is certainly good news for individual investors to see their portfolio grew more than the market average. It is great news for professionals as better performance numbers mean more things to say to the shareholders and investors, more publicity. That leads to more money under management, and more fees…
While it is a good thing if you beat the market, but we would like to ask you some questions. How did you achieve this? Have you done this by taking more risks? Or less risks? Are you aware of the risk levels in the stock market now? Do you know the possible outcomes with this level of market risks?
As I wrote in the previous article The Myth of Beating the Market, beating the market is NOT about more gains in a day, a month, or even a year. It is about beating the market in a full market cycle, that is, the market goes through at least a trough and a peak and back to its original level of valuations. If you come out with more gains after a complete cycle, you beat the market!
Here a good example I like to use is the performance of Dr. John Hussman’s Strategic Growth Fund. The fund has been underperforming significantly since the market recovers in 2009. It gained only 4.63% in 2009, and close to flat this year, while market is delivering double digits returns. But from year 2003 to 2008, while the market made a complete cycle, Hussman Strategic Growth Fund gained 32%, doubled the market’s gain of 16%. Interestingly, the fund underperformed three out of the six years from 2003 to 2008. The fund gained more during the complete market cycle not by gaining more all the time, but by losing much lessin 2008, when the market risk is at the level that will deliver poor future returns.
This is the performance of Hussman Strategic Growth Fund from 2003 to 2008:
| Fund (%) | S&P500 (%) | |
| 2008 | -9.02 | -37 |
| 2007 | 4.16 | 5.61 |
| 2006 | 3.51 | 15.79 |
| 2005 | 5.71 | 4.91 |
| 2004 | 5.16 | 12 |
| 2003 | 21.08 | 28.7 |
| Cumumaltive | 32 | 16.5 |
John Hussman’s fund has been underperforming again in the last two years. He has been fully hedged, and missed most of the gains over the past two years. We are yet to see the outcome for the current market cycle, which we don’t when it will finish.
So where are we will market risks?
We measure the market with the ratio of total market cap over GNP, which is the “single most important indicator” claimed by Warren Buffett. As measured with this ratio, the market valuation is at the similar level as it was in 2004, which is modestly overvalued. The market did go on with another three positive years, delivered a total gain of about 30%, and to terribly overvalued regime. Then we all know what happened afterwards.
This is the ratio total market cap over GNP:
