hussman - useful laws of investing

8/7/2019 Hussman - Useful Laws of Investing

1/21

. , . .HussmanFunds

2011Morningstar IbbotsonConference


2/21

An investment securit is nothin more than a

claim on an expected stream of cash flows thatwill be delivered to investors over time.

How well do observed earnings or cash flowsre resent the future stream?

What is the implied rate of discount? That is,

w at expecte ong-term rate o return s t emarket priced to deliver, assuming the cash flows

m ri liz


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5/21

Valuation models can be useful or reckless.

Garbage in = Garbage out.

Reliable Valuation Methods are driven by theSTREAM STREAM expected toDELIVER

Stocks: Pt = Dt+1 / (k - g*)

B C/ i [1 1/ (1+i)T] + F[ 1/ (1+i)T]on s: B = C/ i [1 - 1/ (1+i)T] + F[ 1/ (1+i)T]Options: C = e-dtS N(d1) e-rtKN(d2)Options: C = e S0N(d1) - e KN(d2)


6/21

Expected Fundamental x Reasonable Multiplep pWarning. Always ask two questions:

1) I s the expected fundamental actually representative ofthe entire stream of future cash flows?

2) I h bl l i l ll bl ? Th2) Is the reasonable multiple actually reasonable? Themultiple quietly incorporates assumptions about futuregrowth and the appropriate discount rate.growth and the appropriate discount rate.


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Thegreaterthevolatilityatimeseriesexhibitsfrompointtopo nt,t epoorert eest mateso growt an per ormance

willbewhenusingpointtopointdata,unlessthosetwopointsreasonablyreflectthelongtermslope.

Arbitraryhorizons(10year,5year,3year)areparticularly

ineffective

may

inadvertently

capture

trough

to

peak

or

eaktotrou hmovements.

a)Moreeffectivetomeasurefrompeaktopeakortroughtotrough acrosseconomiccycles

b)Alternatively,measuregrowthusingmovingaverages,midchannelvaluesorothersmoothedobservations.


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S&P500LongTermTotalReturn=(1+g)(futurePE/currentPE)^(1/T) 1+dividend ield* currentPE futurePE+1 2

Normal

PE

using

FOE

=

12.7

(not

15!)= * ^ . .

Mayalsouseavarietyofothersmoothfundamentals,e.g.Shiller earnin s dividends etc rovidedthatthe ro erhistoricalprice/fundamentalmultipleisused,andgreflectspositionoftheactualfundamentalvs.thenormalizedfundamental.


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Every security that is issued must be held by someoneuntil it is.

Corollary 1: No security can be under- or over-owned. Prices and

outstandingis the exact quantity held. The investors challenge is toask whether those prices and expected returns are reasonable.

Corollary 2: The outstanding stock of issued currency and moneymarket securities always remains effectively on the sidelines andheld by someoneuntil the time those securities cease to exist.

Corollary 3: Money never goes into or comes out of a secondarymarket. I t is always home.


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The ositive association between risk and

expected return only holds for portfolios inwhich ex ected return er unit of riskhasalreadybeen maximized.

Corollary: D iversifiable, overvalued, and

over the long-term.


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DontFighttheFedisfarlesseffectivehistoricallythan

HelpstohavebothNeitherisenoughwhenallofthefollowingareobserved:OvervaluationOverboughtpricetrends verbullish sentimentRisingmarketinterestrates

ar e

ou comes

are

s or ca y

wors

w en

r c

va ua onsarecoupledwithincreasingriskaversion,asmeasuredbyweakorincreasinglydivergentmarketinternals(breadth,

, , .


21/21

Youcanhaveeverythinginlifeyouwant,ifyoulljusthelpenougho erpeop ege w a eywan

Zig Ziglar

Riskmanagementisgenerous:Avoidingmajorlossesisfarmorehelpfultoclientsthancapturingtemporaryspeculativegains.

Onaverage,overhalfthegainsofthetypicalbullmarketaresurrenderedinthesubsequentbear(152% >67%fullcycle).

Encoura eclientstofocusonfullc clemeasuresof erformance.

Encourageclientstomatchtheriskanddurationprofileoftheir.

hussman - useful laws of investing

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