Being Smart or Making Money
As a student of the great market maven Ned Davis, I have been made painfully aware of his most famous quote time and time again, in markets “there’s being smart and making money”. Make no mistake, the two are the not the same. That is not to say that smart people don’t make money as the world is certainly full of brilliant individuals with incredible investment acumen. Though, more often than not, people try to outsmart the market using either sophisticated models, technical indicators or in the worst case, gut instinct. Furthermore, many people fail to recognise that the market and the economy – while related – are not the same thing.
My comments are best exemplified by John Hussman, PHD President of the Hussman Investment Trust which manages the Hussman series of funds. Dr. Hussman’s command of valuation methodology, financial history and econometric modeling is second to none. Over the years, Hussman has stayed true to his philosophy, using his models to outperform and direct his every investment decision.
From the funds’ inception in 2000 until 2008 the funds’ performance had been stellar; delivering very high risk adjusted returns. Though, as noted in one of Research Puzzler’s posts, after 2008 performance started to taper off. While Hussman’s process hadn’t changed, markets did. Unable to adapt to this change or adapt his methodology, the funds’ performance and assets under management have suffered terribly.
The moral of this story is that markets are quite efficient. In the short run, it is possible to outperform, but the odds of successfully doing it over long periods of time are exceedingly low. This example also serves to highlight just how hard it is to select active managers who outperform. As shown by the chart in the aforementioned blog post, AUM reached its highest point when performance just started to wane.