John Hussman, who manages more than $3 billion, saw the handwriting on the wall years ago.

There’s something in his latest newsletter for the bulls (he thinks stocks are undervalued and that the S&P average could return over 10% annually over the next decade) . . . and something in it for the bears (because stocks are only slightly undervalued, the bottom could be significantly lower, and the necessary bank restructurings are being needlessly delayed).

But as his funds’ performance indicates, seeing the mess we were in five years earlier than most people may have made him insightful, but did not make him rich: over those five years his annualized return has been 1.33%. Better than a loss, to be sure; but this is a tough game to win.


Jack Kouloheris: “Would be interesting to hear Less Antman’s viewpoint, as he was ‘All equities All the time’ and insisted that the greatest risk to ones wealth was inflation. That may yet be true…however a 100% equity portfolio is hurting quite a bit now. He told us that even 20% non-equities was making him uncomfortable!”


Never underestimate my friend Less. We don’t march in complete lockstep (e.g., we agree you should “never try to time the market,” but he takes “never” to mean “never,” where I take it to mean, “well, only cautiously and with very good reason”); but I never fail to be impressed with what he says or how he says it (and by that, I mean never).

To wit, his March Newsletter:


The year 2008 may have been the worst calendar year in the entire history of the US stock market. An investment in the S&P 500 lost 37% last year on a total return basis. Although 1931 looks worse on paper (a drop of 43%), that was also a year in which the consumer price level declined significantly, and since we have to buy goods and services at the prices being charged, calculations of return should be adjusted for inflation (or deflation, when it occurs). By that measure, both 1931 and 2008 resulted in 37% losses in wealth, and whether one or the other was slightly worse is debatable, since calculations of inflation are neither precise nor the same for each person (since we all buy different things with our money). Let’s just say it’s a tie.

Unfortunately, there is no virtual tie if we want to measure returns over a 10-year period: the 10 years ended 2008 look like they were clearly the worst. On paper, the loss was 14%, and inflation raised the Consumer Price Index by 32% over that time. As a result, the real (inflation-adjusted) loss over that decade was 35%. This is worse than my calculation for any other 10 consecutive calendar years since the New York Stock Exchange opened in 1792: far worse than any 10 years that included the Great Crash (which were actually flat or slightly positive after considering the deflation in consumer prices), and only approached by the dreadful 30% real declines for the decades ended 1920 and 1842, which most of my readers are probably too young to remember. Do you want to know HOW horrible that 35% loss was for the decade ended 2008? I’ll tell you:


That’s right: the investment everyone is currently racing to buy, even though it is yielding next to nothing: that absolutely safe and secure obligation of the US Treasury, repaid in full every 30 days, would have lost 41% of an individual investor’s real wealth over the 10 years ended December 31, 1950. While T-bills were averaging a return of 0.5% per year, inflation was averaging 5.9%. In 1946 alone, prices rose 18%, and a T-bill holder lost 15% of purchasing power as a result. In one year.

Cash is not safe. No investment is safe in all environments. And right now, I would suggest you consider the words of billionaire investor Warren Buffett, often called the most successful investor of all time, from the annual report of Berkshire Hathaway released in late February, 2009:

“When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bubble of late 2008 may be regarded as almost equally extraordinary.”

Treasury bills, and what most people think of as equivalent FDIC-insured bank deposits (backed by the full faith and credit of the US government), are not builders of wealth. At best, they might preserve it. But in times of great panic (which certainly describes now), people often end up accepting a significant annual loss based on the dubious assumption that the US government can never default because it owns the monetary printing press.

And it IS dubious. International investors are now willingly giving up 1% of the annual return on 5-year Treasury notes to buy insurance against a default by the Treasury. A year ago, they only had to pay 0.05%. This means that the risk of default on these securities has multiplied 20 times. In fact, the cost of insurance against a default on Treasuries is now more than that for the average AAA or AA security! The rating agencies wouldn’t dare say so, but the insurers who have to put their money where their mouth is think US Treasuries are in the single-A category. At this rate, in another year they’ll be junk bonds, especially if they keep promising to protect everyone in America from everything. Hopefully, they’ll get exhausted, or a sleeping sickness will hit Washington, DC. Or the public will stop trusting politicians and realize that “WE HAVE TO DO SOMETHING!” means WE, those who work, and invest, and create. Not those who rule.

If not Treasuries, then what? Many investors searching for a safe haven are actually fleeing from dollars and buying gold. Is that the answer? Well, gold finally set a new high in 2008, surpassing a peak reached in 1980, but only in dollars. Adjusted for inflation, they are still down around 50% since then.

I know, I know. U.S. stocks stink, International stocks stink, Real estate stinks, and the investment Less Antman told you generally goes up whenever stocks are going down, commodity futures, also stinks. When people asked me whether there was any environment in which all 4 categories of equity wealth dropped in the same year, I would tell them I couldn’t find any such year since 1931. Well, I just found another, and I feel your pain.

But when I looked at those other two horrible decades, ending in 1842 and 1920, I also noticed something else. The horrible 10 years ended 1842 were immediately followed by 10 CONSECUTIVE YEARS OF POSITIVE RETURNS, and the horrible 10 years ended 1920 were followed by 8 CONSECUTIVE YEARS OF POSITIVE RETURNS.

Also, while an investor in US stocks might have lost 35% in purchasing power over the 10 years ended 2008, someone who was invested globally did not. A 100% equity investor who split their money equally between US stocks, International stocks, REITs, and Commodity futures at the beginning of 1999 and then didn’t touch it for 10 years would have actually gained 8% above inflation. Admittedly, pretty pathetic, but at least it beat inflation over that time period. Oh, it also beat T-bills.

Folks, it is time for a reality check. Nobody can tell you that an equity portfolio, even a globally diversified one, is safe. But the so-called safe havens aren’t safe, either, whether we are talking about the short-term or the long-term. If the businesses that provide the world’s goods and services do not continue to operate and earn reasonable returns over time, governments will not be able to raise any decent amount of revenue by taxation, and will either print increasingly worthless pieces of paper or default. Gold cannot buy non-existent products: it also depends on continued productivity in society. Production is the foundation of any livable future: there is no reward for successfully predicting the end of the world.

You might as well expect the best: optimism is the only realism. Save, invest, diversify, wait. And find a hobby other than watching the news.


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