Balance is overrated

[karluk]

I had never heard of John Hussman until reading this thread. I'm not sure if that's good or bad. I guess it's good that I don't pay much attention to the pundits and their frequently wrong predictions, but bad that I don't know who the influential players are. But now that his name rings a bell with me, I see that he is the subject of a recent article in the WSJ.

Bearish Manager Missed Big Stock Gains - WSJ.com

Numerous posts in this thread have pointed out that John Hussman has a terrible investing record over the last few years, and I don't wish to belabor the point. His bearishness may very well be justified, but just premature. Time will tell.

 

[CaliforniaMan]

I had never heard of John Hussman until reading this thread. I'm not sure if that's good or bad. I guess it's good that I don't pay much attention to the pundits and their frequently wrong predictions, but bad that I don't know who the influential players are. But now that his name rings a bell with me, I see that he is the subject of a recent article in the WSJ.

Bearish Manager Missed Big Stock Gains - WSJ.com

Numerous posts in this thread have pointed out that John Hussman has a terrible investing record over the last few years, and I don't wish to belabor the point. His bearishness may very well be justified, but just premature. Time will tell.

Over the past 45 years that I have been observing and in the market these types come and go all the time. He is typical of this. Make a big prediction, and keep making it until it comes true. Then market your "genius" like crazy. Negative (fear) predictions are more valuable than positive ones (greed) so these are the more common. People have short attention spans and heck, you don't need to sucker everyone, just enough to get them to buy your forecasts or invest in your funds.

And cherry picking the data is so easy, you get to choose the time spans, the presentation method, the type of data presented, and you have plenty of time to get it setup. After all, you are not actually doing research to understand what is going on, just collecting data that supports your argument.

It is the same over and over again. The real question IMO is why do people seem to need these types to 'explain' things to them, when there is so much real historical data available. I guess I just don't understand peoples fascination with these P.T. Barnums.

 

[lawman]

I had never heard of John Hussman until reading this thread. I'm not sure if that's good or bad. I guess it's good that I don't pay much attention to the pundits and their frequently wrong predictions, but bad that I don't know who the influential players are. But now that his name rings a bell with me, I see that he is the subject of a recent article in the WSJ.

Bearish Manager Missed Big Stock Gains - WSJ.com

Numerous posts in this thread have pointed out that John Hussman has a terrible investing record over the last few years, and I don't wish to belabor the point. His bearishness may very well be justified, but just premature. Time will tell.

Had not seen that...thanks...

 

[brewer12345]

Over the past 45 years that I have been observing and in the market these types come and go all the time. He is typical of this. Make a big prediction, and keep making it until it comes true. The market your "genius" like crazy. Negative (fear) predictions are more valuable than positive ones (greed) so these are the more common. People have short attention spans and heck, you don't need to sucker everyone, just enough to get them to buy your forecasts or invest in your funds.

And cherry picking the data is so easy, you get to choose the time spans, the presentation method, the type of data presented, and you have plenty of time to get it setup. After all, you are not actually doing research to understand what is going on, just collecting data that supports your argument.

It is the same over and over again. The real question IMO is why do people seem to need these types to 'explain' things to them, when there is so much real historical data available. I guess I just don't understand peoples fascination with these P.T. Barnums.

A very nice summation.

I think the reason people are such easy marks for this stuff is the way we are hardwired for survival. If you are a hunter-gatherer, not reacting to a potential threat may be the last mistake you ever make. Opportunities for good things to happen (rabbit stew) will hop by again soon enough, so if you miss one chance there will eventually be others.

 

[mrfeh]

If you have sufficient funds to live on forever and don't mind losing money to inflation, then more power to you, if it helps you sleep at night.

That being said, I can't see any reason to go below 30% equities, even for the most conservative investor.

 

[lawman]

If you have sufficient funds to live on forever and don't mind losing money to inflation, then more power to you, if it helps you sleep at night.

That being said, I can't see any reason to go below 30% equities, even for the most conservative investor.

When you say "losing money to inflation" I assume you mean that bond returns have not kept pace with inflation.. I tried to confirm your position that historic investment grade corporate bond returns have not kept pace with inflation but was unable to find anything..Do you have any hard data?

 

[mrfeh]

When you say "losing money to inflation" I assume you mean that bond returns have not kept pace with inflation.. I tried to confirm your position that historic investment grade corporate bond returns have not kept pace with inflation but was unable to find anything..Do you have any hard data?

No, I don't. However, I also recognize this is an unusual time for bonds. I cannot predict the future, but I think it's safe to say the chances are much greater that rates will increase over the next 5-10 years than that they will decrease. If that occurs, and you are selling bond fund shares for living expenses, you may very well have to deal w/ NAV losses.

Historically, anywhere from 20-80% equities does ok over the long term. It's at the extremes (less than 10% or more than 90%) where you can run into trouble.

Of course, your annual expenses and size of your nest egg need to be taken into account. You may be in the position where putting it under the mattress would be ok.

 

[lawman]

Catastrophes can happen but I would not invest in either bonds or equities any money that I knew I may need in the next five years..That's what C.D.'s and cash accounts are for...That's part of the appeal of bonds. I can receive the dividends from the bond funds which will decrease the likelihood of needing to sell at a loss... I would think intermediate bond funds in theory would completely turn over in about 8 years so I really don't see how one could lose on good bonds if they are willing to stay through a complete bond cycle..Anything is possible I guess. I suppose we could see hyper inflation with extended low interest rates but I know of no significant time period where that has occurred.. Any way you want to cut it I think bonds pose less risk than stocks... I remember a time when the most respected financial gurus were saying "buy and hold". Well you don't hear that much anymore..My greatest losses have occurred in equities that I failed to sell when I could have realized a very nice profit..I've learned my lesson that pigs get slaughtered..

 

[samclem]

I can receive the dividends from the bond funds which will decrease the likelihood of needing to sell at a loss...

You can receive the interest from bond funds. Dividends are what you would get if you held stocks. They also are a regular payment made by many companies, and can allow the holder to avoid cashing out shares in down markets.

It is a very popular investing strategy, with mutual funds set up to make it easy. Many such funds have better long term (e.g. 20 year) investing results with lower end-of-window risk than bond funds. They are great investments for conservative long-term investors who understand the risks posed by bonds and want to include bonds as a smaller part of their portfolios.

 

[lawman]

You can receive the interest from bond funds.

Bonds pay interest. Bond funds pay dividends.

I have a small position in VWINX and just sold PRBLX, after having it for many years, to take my profit..I like both those funds for the reasons you have mentioned and if and when we see another big correction I will go back into them in a big way..

 

[brewer12345]

Catastrophes can happen but I would not invest in either bonds or equities any money that I knew I may need in the next five years..That's what C.D.'s and cash accounts are for...That's part of the appeal of bonds. I can receive the dividends from the bond funds which will decrease the likelihood of needing to sell at a loss... I would think intermediate bond funds in theory would completely turn over in about 8 years so I really don't see how one could lose on good bonds if they are willing to stay through a complete bond cycle..Anything is possible I guess. I suppose we could see hyper inflation with extended low interest rates but I know of no significant time period where that has occurred.. Any way you want to cut it I think bonds pose less risk than stocks... I remember a time when the most respected financial gurus were saying "buy and hold". Well you don't hear that much anymore..My greatest losses have occurred in equities that I failed to sell when I could have realized a very nice profit..I've learned my lesson that pigs get slaughtered..

From the early/mid 1960s through the early 1980s bondholders repeatedly took it in the bakehole.

 

[lawman]

From the early/mid 1960s through the early 1980s bondholders repeatedly took it in the bakehole.

That's the kind of information I'm looking for..Do you have a link?

 

[lawman]

From the early/mid 1960s through the early 1980s bondholders repeatedly took it in the bakehole.

Looking at 10 year Treasuries here

Historical Returns

I don't see it..

 

[karluk]

If you have sufficient funds to live on forever and don't mind losing money to inflation, then more power to you, if it helps you sleep at night.

At the risk of drifting a little off-topic, allow me to quote hedge fund manager, Cliff Asness, on his opinion of the current bond market. The quote is from an article on Mr. Asness's "pet peeves", which I read recently and found highly entertaining. I guess this is as good a place as any to provide his take.

Mrfeh doesn't actually call the bond market a "bubble", but his post is hard to read without interpreting it as a statement that bonds are doomed to lose ground to inflation in the future. This would most likely cause it to fall into Cliff Asness's list of pet peeves, which include unjustified claims that all sorts of expensive investments are in "bubble" territory.

in the wake of 1999–2000 and 2007–2008 and with the prevalence of the use of the word “bubble” to describe these two instances, we have dumbed the word down and now use it too much. An asset or a security is often declared to be in a bubble when it is more accurate to describe it as “expensive” or possessing a “lower than normal expected return.” The descriptions “lower than normal expected return” and “bubble” are not the same thing.
As a current example, take US government bonds. They are without a doubt priced to offer a lower prospective real return now than at most times in the past (as, in my view, are equities). But could it work out? With an unchanged yield curve, which is certainly possible, you would make a very comfortable 4%+ nominal (call it 1%–2% real) a year now on a 10-year US bond, and to find a case where bonds worked out from similar levels, one only has to utter the word “Japan.” Does this make bonds a particularly good investment right now? No. Does it show that they do not satisfy the criteria for the word bubble, thereby demonstrating how the word is overused? Yes.

Cliff Asness is a very clever man and a good writer. The entire article is well worth reading, although I admit it gets a little long-winded at time.

Random Roger: Cliff Asness' Ten Peeves

 

[brewer12345]

Looking at 10 year Treasuries here

Historical Returns

I don't see it..

That is because you are looking only at tax free nominal returns. Add in taxes and especially the high inflation of that period and the bondholder got crushed.

 

[lawman]

What I want to avoid can best be illustrated here.

http://www.moneychimp.com/features/market_cagr.htm

For one who invested a dollar on Jan. 1, 2000 and left it there a full 10 years through Dec. 31, 2009 would find his dollar worth .91 cents..That's an annual loss of .99% and that does not include inflation..That's more risk than I need to take..

 

[brewer12345]

What I want to avoid can best be illustrated here.

CAGR of the Stock Market: Annualized Returns of the S&P 500

For one who invested a dollar on Jan. 1, 2000 and left it there a full 10 years through Dec. 31, 2009 would find his dollar worth .91 cents..That's an annual loss of .99% and that does not include inflation..That's more risk than I need to take..

Then invest in a well diversified portfolio.

 

[lawman]

That is because you are looking only at tax free nominal returns. Add in taxes and especially the high inflation of that period and the bondholder got crushed.

Do you have any data that supports that?

 

[brewer12345]

http://3.bp.blogspot.com/-EKmeHRIqh.../s1600/10-Year+Treasury+Note+Real+Returns.jpg

 

[lawman]

At the risk of drifting a little off-topic, allow me to quote hedge fund manager, Cliff Asness, on his opinion of the current bond market. The quote is from an article on Mr. Asness's "pet peeves", which I read recently and found highly entertaining. I guess this is as good a place as any to provide his take.

Mrfeh doesn't actually call the bond market a "bubble", but his post is hard to read without interpreting it as a statement that bonds are doomed to lose ground to inflation in the future. This would most likely cause it to fall into Cliff Asness's list of pet peeves, which include unjustified claims that all sorts of expensive investments are in "bubble" territory.



Cliff Asness is a very clever man and a good writer. The entire article is well worth reading, although I admit it gets a little long-winded at time.

Random Roger: Cliff Asness' Ten Peeves

I really appreciate that!... I've been struggling to understand how 10 year Treasuries could be in a bubble when everyone knows exactly what they will be worth ten years from now...Fact is they are expensive compared to recent historical prices but they are not in a bubble ..
Thanks for helping feel a little less ignorant

 

[lawman]

http://3.bp.blogspot.com/-EKmeHRIqh.../s1600/10-Year+Treasury+Note+Real+Returns.jpg

Thanks..Your chart is interesting..It confirms my belief that bonds relative to inflation move gradually over several years..Not since 1976 has real returns been negative..Remember real returns are returns after inflation..Although the trend is down it still looks to be several years away from any possibility of going negative... And only then if the trend continues..

 

[clifp]

Thanks..Your chart is interesting..It confirms my belief that bonds relative to inflation move gradually over several years..Not since 1976 has real returns been negative..Remember real returns are returns after inflation..Although the trend is down it still looks to be several years away from any possibility of going negative... And only then if the trend continues..

Are you looking at the same chart I am.. starting in the late 30s for a decade until 1948, 10 year treasury had yields in the 3% range and the actual annual returns were negative.

Also the chart you posted
Doesn't the results give you pause?
Cumulative return of $100 from 1928-2013 S&P $255,553.31
Tbills $1,972.72
Tbonds $6,295.79

 

[karluk]

I really appreciate that!... I've been struggling to understand how 10 year Treasuries could be in a bubble when everyone knows exactly what they will be worth ten years from now...Fact is they are expensive compared to recent historical prices but they are not in a bubble ..
Thanks for helping feel a little less ignorant

You know what 10 year treasuries will be worth in ten years. What you don't know is how that will compare with ten years of inflation. You may come out with a small positive real return, or potentially a large negative real return. It all depends on the future rate of inflation.

Cliff Asness was not saying that ten year treasuries are a safe bet to beat inflation, but rather that there are circumstances where they might possibly work out ok. That's why he is distinguishing between "expensive" assets and a bubble.

 

[lawman]

Are you looking at the same chart I am.. starting in the late 30s for a decade until 1948, 10 year treasury had yields in the 3% range and the actual annual returns were negative.

Also the chart you posted
Doesn't the results give you pause?
Cumulative return of $100 from 1928-2013 S&P $255,553.31
Tbills $1,972.72
Tbonds $6,295.79

I never suggested that bonds were better for long term growth than equities. I suggested they are better for capital preservation for the next ten years..If I had another 85 year time frame as you use in your example I would not be as concerned..

 

[brewer12345]

Thanks..Your chart is interesting..It confirms my belief that bonds relative to inflation move gradually over several years..Not since 1976 has real returns been negative..Remember real returns are returns after inflation..Although the trend is down it still looks to be several years away from any possibility of going negative... And only then if the trend continues..

Confirmation bias is a seductive mistress. Enjoy.