Swedroe: Why Care What Hussman Forecasts?

August 20, 2014

A brief case study on why investors should ignore forecasters.

In my book, “Think, Act, and Invest Like Warren Buffett,” I noted that the Oracle of Omaha advised investors: “We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

I also noted the anomaly, and tragedy, that while investors idolize Buffett, many tend to do exactly the opposite of what he advises—and that applies to acting on the advice of forecasters such as John Hussman.

John Hussman runs the Hussman family of mutual funds. He’s also a former professor of economics and international finance at the University of Michigan, and has a Ph.D. He’s perhaps best known for his persistent criticism of the U.S. Treasury and the Federal Reserve. Since late 2009, he has been calling for another financial crisis due to bad policy choices made by the U.S. government.

Hussman writes a weekly column on his website. He’s highly regarded by many, and often quoted. He clearly is a very smart man who provides thoughtful analysis. With that said, I always advise people to ignore his forecasts because they don’t have any value.

One investor recently asked me to comment on Hussman’s latest musings, which had made him quite nervous. Now, I knew that Hussman had been persistently bearish for quite some time, and I have been asked about his columns fairly frequently. So I went back into my files and dug up what I had written about his comments on the market from Jan. 14, 2013. It provides a great example of why he should be ignored, along with all other forecasters.

From his column: “Present overvalued, overbought, overbullish, rising-yield conditions fall within a tiny percentage of market history that is associated with dismal market outcomes, on average. It’s true that we’ve observed extreme conditions since about March 2012 with little resolution aside from short-term declines. But the S&P 500 remains only a few percent from its March 2012 high, and if history is any guide, the extension of these unfavorable conditions is not likely to reduce the depth of the market loss that can be expected to resolve them.”

Given how well regarded Hussman is by so many, this type of analysis could tempt even disciplined investors to stray from a well-developed plan. Of course, we know now that the S&P 500 Index went on to return 32.4 percent in 2013, and the MSCI Small Cap Index returned 39.1 percent. And both indices have continued moving higher through July 2014, despite continued strong warnings by Hussman.