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Smarter Than the Rest?
By Dawn Smith
JOHN P. HUSSMAN'S computer models exclude most human emotion from the stock-picking process at the young Hussman Strategic Growth fund (NASDAQ:HSGFX - news). But in this market, cold computer logic is paying off. The portfolio is up 9.45% year-to-date and 27.15% over the past 12 months, making it the best-performing fund in the midcap-blend category for both time periods, according to fund-tracking firm Morningstar.
Who
Hussman, 39 years old, spent years in academia, evidenced by the alphabet soup behind his name: a B.A. in Economics and an M.S. in Education and Social Policy from Northwestern University and a Ph.D. in Economics from Stanford University. When he started his Ph.D. back in 1988, he also began managing money for wealthy investors through Hussman Econometrics Advisors. And while he did teach as a professor for seven years at the University of Michigan, the lure of investment management eventually pulled him away from ivy-covered walls. Last year the transition became complete when he launched a mutual fund aimed at the smaller investor.
His View
As an ardent disciple of econometrics (for us non-econ majors, that's the statistical and mathematical analysis of economic relationships), Hussman uses computer models to evaluate the tie between stock valuations and current market movements, which he calls ``market action'' or ``trend uniformity.'' He isn't just talking about the latest movement of the S&P 500 or the Dow. His models examine myriad data points, from bellwether industries such as utilities, retail and transportation to corporate bonds and market leadership.
While analyzing the current climate, the computer models seek to distinguish between market signals and market noise, ``like a radio tries to filter out the noise so you can listen to the music,'' Hussman says. The problem of separating the signal from the noise plagues many investors, he believes, leading people to oversimplify market problems. One of his pet peeves? People who say, ``If you liked a stock at $40, you gotta love it at $20.'' Such a drop is almost always based on information combined with some noise, Hussman says, which may mean that the stock's new price is appropriate. If it isn't, however, Hussman's computer models should detect that.
Although Hussman makes the final decision regarding which stocks he'll buy for the fund — and whether he'll employ hedging or leverage within the limitations detailed in the fund's prospectus — all stock picks are generated by the computer.
What He's Buying
Consumer-oriented firms have been in Hussman's shopping cart lately, including Newell Rubbermaid (NYSE:NWL - news), apparel manufacturer VF (NYSE:VFC - news), hair-salon operator Regis (NASDAQ:RGIS - news) and heating-and-cooling-product maker York International (NYSE:YRK - news). While many investors are worried about consumer spending, Hussman notes that though growth rates may slow, consumers have always spent more each year in terms of dollar value, even during recessions. Notably, however, the fund's models recently selected stocks in companies that cater to the budget-conscious consumer.
What He's Shunning
Financial stocks are ``terribly vulnerable'' for several reasons, Hussman says. He points to high valuations on a historical basis and the fact that financial firms are coming off a multiyear lending boom, putting their volumes under pressure. There's also the issue of credit risk. ``When we have a group that's characterized by revenues likely to fall, write-downs likely to increase and valuations too high, it's not a great situation,'' he says.
For the bulk of the past year, Hussman has avoided technology stocks, but in late September he nibbled on Hewlett-Packard (NYSE:HWP - news), Gateway (NYSE:GTW - news) and Intel (NASDAQ:INTC - news) after they were hit hard by investors in the wake of the terrorist attacks. But his bias against tech isn't completely gone, he says, since he thinks ``glamour names'' such as Cisco Systems (NASDAQ:CSCO - news) are still overvalued and exhibiting poor market action.
Quote/Unquote
``My models don't know we're at war, they don't know our country has faced terrorist attacks. But the pattern of market action that we've seen post-Sept. 11 suggests that the economy, quite contrary to improving over the next couple of quarters, is likely to deteriorate far more signficantly than people expect.''
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