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Market Timing & Mutual Funds
Old 08-30-2005, 07:25 AM   #1
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Market Timing & Mutual Funds

I suppose some have already seen this week's article from John Hussman. But I thought it had a good argument for not putting lump sums (such as from the sale of real estate) into an index fund at this time. The two supporting articles offered inside this piece further clarify his point.

http://www.hussmanfunds.com/wmc/wmc050829.htm

--Greg
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Re: Market Timing & Mutual Funds
Old 08-30-2005, 09:36 AM   #2
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Re: Market Timing & Mutual Funds

From one of Hussman's articles:

If you're an index die-hard, dollar-cost averaging into stocks, you can be comfortable staying with your plan - particularly if your existing wealth is small relative to your expected future savings. But if you've got all your dough invested in stocks, and it's all the dough you're ever going to make, think twice. Then think three times. Both theory and historical evidence are against the proposition that stocks will be a very rewarding investment for long-term investors committing a lump-sum to the stock market at current prices. It's a point I've made often in recent months, but I can't imagine how it could be over-emphasized.

I don't understand what the strategy would be if you agree with Hussman's position. Hold cash and wait? Then inflation eats the cash away.
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Re: Market Timing & Mutual Funds
Old 08-30-2005, 10:27 AM   #3
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Re: Market Timing & Mutual Funds

Quote:
Originally Posted by Martha
From one of Hussman's articles:

If you're an index die-hard, dollar-cost averaging into stocks, you can be comfortable staying with your plan - particularly if your existing wealth is small relative to your expected future savings. But if you've got all your dough invested in stocks, and it's all the dough you're ever going to make, think twice. Then think three times. Both theory and historical evidence are against the proposition that stocks will be a very rewarding investment for long-term investors committing a lump-sum to the stock market at current prices. It's a point I've made often in recent months, but I can't imagine how it could be over-emphasized.

I don't understand what the strategy would be if you agree with Hussman's position. Hold cash and wait? Then inflation eats the cash away.
He mentioned somewhere in those articles that holding cash (leaving it on the table--unused) is one of the hardest things for an investor to do (especially with inflation fears out there). Then he backs this idea up by talking about the results of not riding a bear market down with your 'invested' money but just buying (with safe liquid short-term assets) the stock market when the PEs are below at 15.

Adjusted for the financial market lies, he sees the current PE at 54 on the S&P Index funds. I believe he likes short-term treasuries (e.g. SHY) but can't remember where or if I saw that in his writings. Ther are no easy or comfortable or safe answers to our mess.

--Greg

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Re: Market Timing & Mutual Funds
Old 08-30-2005, 10:47 AM   #4
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Re: Market Timing & Mutual Funds

Quote:
Originally Posted by Apocalypse . . .um . . .SOON
He mentioned somewhere in those articles that holding cash (leaving it on the table--unused) is one of the hardest things for an investor to do (especially with inflation fears out there). Then he backs this idea up by talking about the results of not riding a bear market down with your 'invested' money but just buying (with safe liquid short-term assets) the stock market when the PEs are below at 15.

Adjusted for the financial market lies, he sees the current PE at 54 on the S&P Index funds. I believe he likes short-term treasuries (e.g. SHY) but can't remember where or if I saw that in his writings. Ther are no easy or comfortable or safe answers to our mess.

--Greg

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54? The official quote I saw was P/E of S&P 500 being around 20, he thinks it's almost three times that?
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Re: Market Timing & Mutual Funds
Old 08-30-2005, 11:02 AM   #5
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Re: Market Timing & Mutual Funds

Quote:
Originally Posted by Apocalypse . . .um . . .SOON
Adjusted for the financial market lies, he sees the current PE at 54 on the S&P Index funds.
So, does he think that the "lie factor" is high, or is it at the historical mean?

FWIW, the market PE hasn't seen 15 for about 15 years. So, you might have to wait a long time to enter the market. And, if the PE does hit 15, why would it stop there? If you believe in *regression* to the mean, it should stay at around 5-10 for as long as it's been around 20-25.
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Re: Market Timing & Mutual Funds
Old 08-30-2005, 01:01 PM   #6
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Re: Market Timing & Mutual Funds

John Hussman has written an outstanding article.

Quote:
Originally Posted by Apocalypse . . .um . . .SOON
..
Adjusted for the financial market lies, he sees the current PE at 54 on the S&P Index funds. I believe he likes short-term treasuries (e.g. SHY) but can't remember where or if I saw that in his writings. Ther are no easy or comfortable or safe answers to our mess.
It is the price to dividends ratio, not price to earnings, that stands at 54. This corresponds to a dividend yield just under 2%.

From the article:
Quote:
It follows that the tightest forecast we can make for long-term stock returns is for a holding period which matches the duration of the market. The duration of the market, as it turns out, is simply the price/dividend ratio (it takes some tedious math to get that result, but it's true). To the extent that bulls may argue that dividends are depressed here, we can capitulate and create a “phantom” dividend equal to half of current peak-earnings, and cap the duration at twice the price/peak-earnings ratio. Fine. So for instance, if the dividend yield on stocks is 4%, the duration of stocks is about 25 years. If the dividend yield is 3%, the duration of stocks is about 33 years. Currently the price/dividend ratio for the S&P 500 is about 54, but we'll cap the duration at twice the price/peak earnings ratio, or just under 40 years.
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Re: Market Timing & Mutual Funds
Old 08-30-2005, 02:05 PM   #7
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Re: Market Timing & Mutual Funds

Quote:
Originally Posted by Martha
I don't understand what the strategy would be if you agree with Hussman's position.* Hold cash and wait?* Then inflation eats the cash away.*
Martha, IMO the easiest strategy would be to invest in one or both of his funds. His strategic growth has a 1% annual fee. Turnover is considerable though, so to get an idea of the overall tax on you from owning it might take some work. In this fund, he buys as many as 100 issues long, then when he feels risks are high, he hedges this by buying puts and selling calls to offset the premium costs. The fund has an excellent record. He has almost all his money in it.

I recommended that my wife buy some of this. She hates losses or drawdowns, and I am getting wary of managing her money.

Another approach would be to use his ideas about market risk to make your own strategy. You could hedge equity exposure on which you would have to pay CG tax if you sold; sell equities in tax deferred accounts; and refrain from making new equity commitments until you (or Hussman) see a better risk/return picture.

Personally I don't feel that inflation is that much of a problem in this context, because this is a strategic, not permanent allocation. And in any case, if you are going back and forth between (cash or near cash) and equities, the price movements you are most concerned with are the relative movements of cash and stocks.

If you accept Hussman's data and logic, you also will strongly believe that the 5% or so available in cash could well be a greater return than that given by stocks over some fairly long time period. And it will surely be a less risky return.

Remember, cash has a zero duration while stocks at current yields have a very long duration.* The only thing you are giving up with a large reserve is some possible speculative gain. One can't be prudent and also milk every last ounce of lunacy from a position.

Another thing, look at a chart of the last two years. Up and down, up and down, but not going anywhere much. (Speaking here of Dow or S&P)

haha

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Re: Market Timing & Mutual Funds
Old 08-30-2005, 02:34 PM   #8
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Re: Market Timing & Mutual Funds

Quote:
Originally Posted by HaHa


Remember, cash has a zero duration while stocks at current yields have a very long duration.* The only thing you are giving up with a large reserve is some possible speculative gain. One can't be prudent and also milk every last ounce of lunacy from a position.


haha

Hmmm, maybe the market has a long duration by scaremonger Hussmann's SWAG, but individual stocks vary considerably. Find something with a 5 to 10% yield and you have cut that duration way down. How would you work stock buybacks into this "metric"? Add them to dividends for the calculation of yield/duration?
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Re: Market Timing & Mutual Funds
Old 08-30-2005, 02:49 PM   #9
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Re: Market Timing & Mutual Funds

Quote:
Originally Posted by HaHa

Another thing, look at a chart of the last two years. Up and down, up and down, but not going anywhere much. (Speaking here of Dow or S&P)
Over last two years, Dow is up 9%, S&P is up 17%. Not great numbers, but they are definitely up. If you're a market timer or "strategic portfolio allocator" (market timer), then you may or may not have been in the market for these runups. During that two year period, the markets have been up and down for sure, but they have generally been increasing.
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Re: Market Timing & Mutual Funds
Old 08-30-2005, 03:35 PM   #10
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Re: Market Timing & Mutual Funds

I think his article is more arguing that at the present time, long term expected returns from stocks is lower than it has been in the past. I tend to agree, especially that the expected risk premium from stocks isn't as high as it has been. I don't think he's saying much about index funds in particular.

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Re: Market Timing & Mutual Funds
Old 08-30-2005, 03:50 PM   #11
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Re: Market Timing & Mutual Funds

Quote:
Originally Posted by brewer12345
Hmmm, maybe the market has a long duration by scaremonger Hussmann's SWAG, but individual stocks vary considerably.* Find something with a 5 to 10% yield and you have cut that duration way down.* How would you work stock buybacks into this "metric"?* Add them to dividends for the calculation of yield/duration?
I think we discussed this aspect in another thread. I agree that there are individual stocks where buyback shrink the shares outstanding quite a bit, and with regularity. Hussman is not talking about individual shares, he is talking about aggregates. And individual stocks were not the topic of this particular thread. However buybacks when they are even implemented, very often but not always are offset of even swamped by issuance of stock to officers(mostly) and other employees.

I also feel that to call Hussman a scaremonger is misplaced. He may have a different idea from you, but his arguments are very careful, and he makes them public regularly. He has a PhD in economics from Stanford; he worked as a quant with an options trading firm, he taught at the University of Michigan before starting his money management and later his mutual fund firms.

So while he may be wrong, IMO he deserves respect such that one should try to refute his arguments, not resort to name calling.

Ha
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Re: Market Timing & Mutual Funds
Old 08-30-2005, 04:22 PM   #12
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Re: Market Timing & Mutual Funds

Fair enough, ha, but I note that pessimism seems to sell an awful lot of media and therefore tend to be naturally suspicious.
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Re: Market Timing & Mutual Funds
Old 08-31-2005, 10:57 AM   #13
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Re: Market Timing & Mutual Funds

I have looked into this matter on my own. Visit my Notes section and scroll down to If You Don’t Want to Wait. I have written several articles, beginning with You Can’t Count on 7%.

Notes Section

Have fun.

John Walter Russell
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