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Hussman Funds Annual Letter To Shareholders - June 2014

September 02, 2014

The Hussman Funds continue to pursue a historically informed, value-conscious, risk-managed investment discipline focused on the complete market cycle. From thestandpoint of a full-cycle discipline, it is essential to understand the current position of the market within that cycle.

Only a handful of instances in history – 1929, 1972, 1987, 2000, and 2007– match the syndrome of overvaluation, lopsided bullish sentiment and overbought multi-year equity market speculation as extreme as we observe today. Every instance was somewhat different, of course. For example, on measures that we find most strongly related with actual subsequent total returns, large-capitalization stocks were more extremely overvalued in 2000 than today (primarily because of breathtaking valuations in the technology sector), whereas the median stock is overvalued to a greater degree today than in 2000, making present concerns much more broadbased.

The main difference between the recent market advance and those other instances is that severely overvalued, overbought, overbullish conditions have been sustained for a longer period without a material market retreat. In our view, investors should be more concerned about market risk, not less, the longer this delay continues.

By the end of a market cycle, the illusions within it are laid bare. That repeated narrative runs through more than a century of market history. Investors might recall the lessons more readily, except that as the legendary value investor Benjamin Graham once observed, “the memory of the financial community is proverbially and distressingly short.”

Investors do not kindly remember 1929, 1972, 1987, 2000 and 2007 for the optimism that brought the stock market to those peaks. Instead, we remember them for the damage that was inflicted when the illusions beneath them were shattered. The unraveling of the late 1990s' technology bubble took only two years but wiped out the entire total return of the S&P 500 – in excess of the return on risk-free Treasury bills – all the way back to May 1996, while the technology-heavy Nasdaq Composite lost more than three-quarters of its value. Likewise, the unraveling of the mid-2000s’ housing bubble took less than two years but wiped out the entire total return of the S&P 500 – in excess of the return on risk-free Treasury bills – all the way back to June 1995.

Investment results over the full course of the market cycle are determined not only by what happens during a bull market period, but also what happens as the cycle is completed by a bear market. While past performance does not ensure future results, it is instructive that, on a total return basis, the S&P 500 lost -47.41% from

Continue reading: http://www.hussmanfunds.com/pdf/annrep14.pdf

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