Good Hussman Commentary

[bmichaud]

http://www.hussman.net/wmc/wmc110829.htm

 

Dr. Hussman continues to cite his recession composite data set as evidence that we are currently in or headed into a recession. As usual, he also continues to believe the general market is overvalued. While I do not believe in hedging an individual stock portfolio 100% as he does, I do believe his opinion on the general level of the market (along with others such as Grantham and Schiller) is helpful in the long run. Even while Buffett was able to fine "net-nets" back in his BPL days, he still hedged a portion of his portfolio against the vagaries of the general market according to his long-term outlook for the market...a good example that I use to manage the market exposure of the money I manage.

 

While buying fear is a useful tool, as discussed on a recent thread, I think blindly following a system of buying into fear is dangerous especially considering an overvalued market and a hideous economic backdrop. Hussman's recession warning combined with the potential European implosion (http://pragcap.com/the-end-of-the-world-part-1) has the potential to bring the general market quickly down to fair value and potentially lower, all the while making seemingly cheap stocks even cheaper. Again, I am not advocating hedging 100% of one's portfolio or waiting for Coca-Cola to sell for 3X earnings (i.e. Munger style), but rather to take into account the unprecedented macro environment we find ourselves in, one that the developed world has not faced since the Great Depression (i.e. the unwinding of a massive credit bubble), and prudently building in a margin of safety to one's purchases.