The Curious Case of John Hussman: Understanding the Biases in Your Process

“We have no control over outcomes, but we can control the process. Of course, outcomes matter, but by focusing our attention on process we maximize our chances of good outcomes.” Michael Mauboussin

Barry Ritholtz wrote a great column for the Washington Post recently on an important topic that investors must understand to be successful over the long haul. Here is Barry with the takeaway from that article:

Process-oriented investing is a long-term approach to putting capital at risk by owning a broad variety of asset classes, making periodic contributions and regularly rebalancing. You can just hear the marketing guys screaming, “Boring! How can we ever sex up that sort of approach?!”

Focusing on your investment process, and not the outcome, should be your goal. Here is the payoff: Over the long term, a good process delivers highly desirable results, and generates better and more reliable outcomes. There is nothing boring about that.

It’s not easy to have this mindset, but it’s really the high probability way to think about complex and adaptable markets that are impossible to predict.

You can get lucky once or twice but your luck will run out eventually if you don’t have a disciplined process to follow when things don’t go as planned.

Yet there are times when our ingrained cognitive biases can creep in and ruin the processes we have in place.

Case in point is mutual fund manager John Hussman who has seen better days with the lagging performance of his flagship Hussman Strategic Growth Fund (HSGFX).

He explained his strategy in a recent weekly commentary:

Our own discipline pursues stronger returns and smaller drawdowns than a buy-and-hold approach, but with an emphatic focus on the complete market cycle.

During the 2000-02 bear market the Hussman’s fund posted phenomenal performance by sidestepping most of the carnage and posting gains. Hussman does this by periodically hedging his stock market exposure through put options that should go up in price when the market declines.

The fund also posted impressive relative results during the 2008 crash by losing only 9% in while the S&P 500 was down 37%.

Predictably, billions of dollars poured in from investors seeking the Holy Grail of investing — upside participation with limited downside risk.

Unfortunately for Hussman and his investors, it’s been downhill ever since as he has continued to hedge market exposure throughout the entire bull market recovery.

The five year annual return (through 2/26 per Morningstar) on the fund is -3.5% against the S&P’s 22.2% a year. Ten year returns are -1.2% annually while the S&P has delivered around 7.1% a year.

That’s over 105% in relative underperformance over 10 years.

Hussman uses an exhaustive data set to make his hedging decisions based on a long list of historical factors. And while 2009 threw out extraordinary values in the stock market, Hussman decided to override his quantitative approach to add a more robust data set going back to the Great Depression.

He explained this thought process in another weekly update:

Unfortunately, it was unclear at the time whether the state-of-the-world was better characterized by post-war data (in which our existing methods had performed well) or in Depression-era data in which our existing methods allowed greater periodic losses than I viewed as tolerable.

A small part of me respects the guy for sticking with his hedging process all the way up.

But I also think he changed his system at the bottom of the market to coincide with his views for what should happen and has now stubbornly stuck with those same views to the tune of terrible performance.

The Depression-era data was always there, so why add it to the process only after a huge panic in the markets?  It’s never clear which data set we should use to compare to the current situation because every cycle is unique.  There are no perfect solutions.

The big lesson here is not that Hussman made an error in judgment that cost his fund performance numbers.

It’s that our cognitive biases are often the worst when we need to ignore them the most. Human nature tends to become magnified at the extremes.

We get greedy after participating in large gains or missing out on large losses and scared after seeing a big drop in the market. Making process changes after extreme gains or losses is an easy way to allow the recency effect to creep in.

You need to ask yourself a few questions when setting up or altering your process and rules:

(1) Would I have been able to follow these rules during past market cycles?
(2) Does my process take into account the fact that I will be wrong at times?
(3) Does this process systematically automate good behavior that’s not based on short-term outcomes?
(4) Am I changing my process to validate my current forecasts?

I don’t know the exact logic behind Hussman’s thinking, but I do know that it was not easy for many to buy at depths of the market in early 2009 even though the stocks were trading at their lowest prices in years.

Market timing is probably the strategy that holds the most appeal to investors because it looks so easy in hindsight.  It’s also the most difficult to put into practice in actual market conditions.

Timing indicators can look great in computer backtests but fail to work in real time.

Forcing yourself to buy back in once you’ve taken all of your market exposure off of the table is so hard on your psyche. There will always be a reason to wait just a little bit longer to try to nail the bottom.

Trying to time the market means your decisions rely almost exclusively on outcomes, which completely contradicts the entire process > outcomes theory.

As exciting as it can be for investors to try to go all in or all out, you are much better off with a diversified approach that doesn’t rely on your ability predict short-term market moves.

Hussman even admits that he believes a diversified long-term approach works if the investor has the discipline to adhere to such a strategy:

I have no argument at all with investors whose strategy adheres to a disciplined buy-and-hold, diversified across asset classes, over the full course of the market cycle. In contrast, I have great concern about investors who discover buy-and-hold at the top, and adhere to it only long enough to abandon it at the bottom.

It can be uncomfortable to stick with your process and rebalance to sell higher in one asset class and buy lower in another in the same way that it’s difficult to time the market.

This is why they say investing is simple but not easy.

I’m all for updating your thought process when the facts change. But most of the time you will be better off sticking to your plan or doing nothing at all.

The Road to Easy Street (Hussman Funds)
The Diva is already singing (Hussman Funds)
Outcomes or process – what investment focus succeeds over time? (Washington Post)


This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.

What's been said:

Discussions found on the web
  1. Eric commented on Feb 28

    Ben, good article. I admit this story fascinates me.

    Here’s the thing with Hussman. He might be the Steven Hawking of portfolio management, but how would we know? Most investor’s lifetimes or attention spans are so short (and I put myself in this category), we simply cannot or will not hold on to even the best investment strategies that take many years or decades to pay off.

    As soon as you’ve convinced yourself that “market tracking error” isn’t a real thing, just think for a minute about how much ability you would have to stick with 800 bps per year of underperformance relative to the S&P 500 – in the form of negative 10 year returns! I quite frankly am shocked this guy has any money left in his funds. Just who are these masochistic shareholders? I’ve found it challenging enough to get clients to rebalance out of bonds and into stocks after a 20% to 40% temporary decline (or vice versa after a few years of equity gains). Sit tight after a -10% total return for 10 years? Nice knowing ya!

    Personally, I’ve made a small policy adjustment in the last year or so with clients to address this very fact – the heart of our allocations are large/small value stocks in US, Int’l, and EM markets with some short-term global fixed income to dampen risk (all via asset class funds from DFA). However, I’m not kidding myself that after a 5 year stretch of large cap and growth going on a run such as the Nifty Fifties or the Tech-Boom 1990s, clients are going to be itching and scratching pretty hard to get in on that action…so, I hold my nose and put a slug of US Large Growth stocks in there just to ease the eventual performance anxiety from our boring/stodgy value stocks. I feel a bit better about it today given that sorting growth on profitability shouldn’t subject us to quite the same performance deficit as traditional high P/E or P/B index funds, but it ain’t gonna be anything like large or small value expected returns.

    In the end, tis better to have a portfolio you can hold (and will get you to your financial goals) than one you expect to top the performance charts or squeeze every last sharpe ratio basis point out of the market. Because you only get dollar-weighted returns, not the time-weighted ones.

    • Ben commented on Mar 01

      Good comparison. His strategy & patience is fascinating. His shareholders must all be still scared/worried about a crash and love the idea of being able to say they missed out. Still over $1 billion in the the fund last time I checked.

      Small shifts or tilts like yours are much less hit or miss. No short-term glory with that strategy but much less prone to huge mistakes. Losses hurt but they come with the territory and long-term returns are worth it.

  2. Session 119–This Bubble is “Beyond 1929 and 2007.” | Kort Sessions commented on Jul 31

    […] “The {Hussman’s} five year annual return (through 2/26 2014, MorningStar) is -3.5% against the S&P’s 22.2%. Ten year returns are -1.2% annually, while the S&P delivered around 7.1% a year. That’s over 105% in relative underperformance over 10 years.”(“Curious case of John Hussman: Understanding the bias in your process–awealthofcommonse… […]

  3. tew commented on Aug 13

    Great, clear, concise article and Hussman is a great example.

    I’ve been reading Hussman for a decade and always enjoy his commentary and analysis. But I’ve never bought is repeated justifications for missing with his two data sets Depression-era testing. The man doth protest too much.

    When he saw conditions that he thought demanded additional research he had two choices:
    1) Stick with the current models until the analysis is complete
    2) Abandon the current models and freeze in a bear posture until the analysis was complete.

    He chose two. I’ve never understood why and cognitive bias is the best idea I’ve come across. That and the fact that everyone has at least a sliver of gambler inside and at least a sliver of glamor inside. Perhaps he couldn’t resist the notion that the markets may indeed tank to GD levels and he’d be able to go in and scoop up the markets. He’d have been a legend if the market would have only spiked down a couple hundred more points on the S&P500.

  4. mpmassey commented on Jan 29

    I would not give a dime to Hussman for him to manage it. I have no idea if his IQ is either above or below average. I will guess it is below. Regardless, the level of IQ does not necessarily indicate success in portfolio management.

    Hussman had no tech stocks at the turn of the century. Neither did I. I was up in both ’01 and ’02 while the S&P got crushed.

    Hussman is a perma-bear. His 15 min was in ’08-’09. As you state, it has been down hill ever since for him and his funds. I think it’s amazing he has any AUM left and has not been forced to close his funds. “Sucker born every” minute still holds.

    If you liquidated anything at any point in fall of ’87, you can’t hold to a “process”. Stay out of the stock markets.

    • Ben commented on Jan 29

      I don’t think you’re alone on this. The problem is that he let his thoughts and political ideologies about the Fed cloud his views on portfolio management. You can never let that stuff get into your investment process. You try to be right instead of making money which never ends well.