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John Hussman and the Coconut Milk Run

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July 24, 2013 – Comments (2)

Board: Macro Economics

Author: ADrumlinDaisy

Not everything has to have a point.

Alternatively, sometimes the point can be sort of elliptical.

And on occasion, the point can simply be to help kids, caught up in their own rapidly changing lives, understand that the old guy who sits on the stump and writes the occasional check – well, once upon a time, he did a few things too.

Maybe there can even be an abstract point connecting investing today to a Crosby Stills and Nash song, although that seems a bit stretched.

The truly good news is that no one (other than my children) is obligated to read this post.

* * * * * * * * * * * * * * * * * * * * * * * * *

“Say, Rich, what do you say we do the Coconut Milk Run?”

A voice from the distant past – specifically, my time in Newport Beach California, more than forty years ago. And, that voice was making no sense at all.

“Hi, Thurgood (not his real name), long time no talk. But I am kind of into Hot Chocolate these days . . . .

“No, you dweeb; let’s get the old gang together and do the Coconut Milk Run again. We could leave in April and duck out of the tropics before cyclone season.”

And now it made sense, in that peculiar version of “sense” that seems to exist only in Southern California. Thurgood was an old friend from my attorney days, who has the additional distinction of being one of the best sailors in the world. He sailed in multiple America’s Cups and one Olympics, and back in the day would have experiences like this:

Cindy (our shared secretary): “Messrs. Thurgood and Daisy, I have messages for both of you!”
Me: “Do Thurgood first.”
Cindy: “How exciting, Mr. Thurgood! A ticket is waiting for you at John Wayne airport; you leave for Marseilles tonight to sail Mr. Turner’s 12 meter in a race this weekend.”
Me [as Thurgood grabs his coat and heads for the door]: “And my message?”
Cindy: “Mr. Barkleby wants the memo by Saturday night.”
Me: “Tell him I will be in Marseilles . . . No, just kidding. Please order a pizza for me on your way out.”

Anyway, Thurgood was waiting, so I put the reminiscences on hold and answered, “Sorry Thurg, but I am kind of busy; I am thinking about writing a little summary of John Hussman’s latest commentary for my kids and my friends on an investing board . . .

* * * * * * * * * * * * * * * * * * * * * * * * *

John Hussman’s latest piece caught my eye for several reasons (including the usual one – despite being horribly wrong for something like 4 years now, he is intelligent and makes sensible arguments).

The article is well worth reading in full and can be found here:

John Hussman, “The Road to Easy Street,” 7/22/13
http://www.hussmanfunds.com/wmc/wmc130722.htm

Hussman’s First Good Anecdote.

OK, this is a real landmark; we have a very cool Hussman anecdote that does not feel as if it were written by an inter-galactic alien posing as a human:

Arnie [his calculus teacher, apparently a priest] had this stuffed buzzard, and if you got a question wrong, he would plop it on your desk – “YOU get the buzzard. He will not be removed until you redeem yourself.”

I am sure you have the exact same reaction to this that I did – “Wow, I want a stuffed buzzard of my own!”

Anyway, upon reading this I immediately sent my daughter Sammie down to the mall in Charleston with the instruction that she could have a $100 spending money iff (“if and only if”) she brought me back a real stuffed buzzard, the budget for which was essentially unlimited.

She did not bring me back a buzzard, but she did order one from an online taxidermist, which apparently looks very much like this one:

http://www.liveauctioneers.com/item/2347237

And there is a lesson here, because I had in my mind, unaccountably (since I have lived in the country most of my life), something more along these lines:

http://www.worthpoint.com/worthopedia/real-turkey-vulture-mo...

Yes, I have purchased (at great expense) a buzzard, thinking I was buying a vulture. So that is somewhat of a negative. On the other hand, “You get the buzzard” definitely sounds better than “you get the vulture,” so all is not lost.

What is the lesson here? Well, to be honest, I am not sure I can extract anything very general. Sure, we should all keep our buzzards and our vultures straight, but this seems like a rule of limited application.

My daughter points out a second lesson –namely, that possibly Arnie’s buzzard was a stuffed buzzard in the sense of a plush toy, in which case I spent about a thousand times as much as I needed to to duplicate the cool anecdote. But, don’t you think it is much more effective to plop down a REAL stuffed buzzard on someone’s desk than a silly toy buzzard?

Anyway, we are deep in a discussion of John Hussman’s latest analysis, and want to avoid any risk of getting sidetracked. So back to Dr. Hussman’s text.

Do Not Buy and Hold the Daisy Way.

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.

Someone has been reading my mail! I am trying hard to change this, though, honestly.

* * * * * * * * * * * * * * * * * * * * * * * * *

Thurgood and I were walking together into our law firm’s building and, as we opened the door, a huge wind came blasting out – almost impossible to resist. It was undoubtedly the consequence of different indoor and outdoor temperatures, but it matched a force that was working on our souls, I think . . . .

Anyway, Thurgood let the door shut and just looked at me, and I said, “Let’s go to McGuire’s.” And over the course of many pre-lunch Irish whiskeys, old things were abandoned and new decisions made.

Neither of us ever went back to the firm, not that day, not ever.

Thurgood opened up his own small practice, well-financed by business from Newport Beach’s wealthy sailing community, and dedicated himself even more to sailing.

I left California and the law, free of responsibility and completely broke, and moved to Virginia, where I convinced a university to take me on as a physics Ph.D. student although I had never taken a physics course. (I had to do one make-up year of undergraduate courses.)

Oh, and one more thing . . . .

We decided to do the Coconut Milk Run.

* * * * * * * * * * * * * * * * * * * * * * * * *

John Hussman is a cautious guy. That earns my respect – I do not want someone who manages my money to be a hero or a gunslinger. In his view:

This Is Probably Not the Time to Back Up the Truck.

Presently, we observe a syndrome of strenuously overvalued, overbought, overbullish conditions . . . , every important variant of [which] . . . collects the present instance into a small subset of history that we call a “Who’s Who” of awful times to invest.

Which is fine, except that the market keeps going up and up, and I keep missing it because I pay attention to these darn weekly commentaries . . . .

* * * * * * * * * * * * * * * * * * * * * * * * *

There was lightning everywhere, and rain that never stopped. There was everything but steady wind. And it was pretty scary, to be honest. Some Milk Run!

We left Catalina Island in early April, back in a prior millennium, sailing southwest and making pretty good time once we got away from the coast. In fact, then and for much of the later part of the trip, we were “sailing a reach, before a following sea” -- Google that phrase and you will get a great Crosby Stills and Nash song – which is about as good as sailing gets.

When we got close to the equator, though, we turned almost due south, seeking to plow through the dreaded Intertropical Convergence Zone (ITCZ) as quickly as possible and then jibe to catch the trades and make the famed Downhill Run into Fiji. The ITCZ is where the northern and southern trade winds merge and sort of peter out – Thurgood told me that in olden days the zone was referred to as the “doldrums,” which was very apt for quite a while – slow, steady, boring progress.

But then the storms hit, and apparently this is very commonplace in the ITCZ. And it was uncomfortable and nerve-wracking. I was very thankful for my shipmates and the numerous other boats doing the Coconut Milk Run –it is a small community that re-emerges (with different components) every year, and the seas are so vast there is no other support if one is in trouble.

At one point I (perhaps naively) asked Thurgood if we could just drop anchor and ride a storm out. Leaving aside all the many other flaws in this idea, he pointed out that the ocean was at least two miles deep, and our anchor line was thus a tad too short. At that point I had not yet become an “old salt.”

* * * * * * * * * * * * * * * * * * * * * * * * *

And now, as an investor, I feel as if I am once again in the doldrums – a market that makes no sense, and thrashes around, advancing fitfully, but also full of danger. It is tempting to change course, but, just as Thurgood knew better, so too does Dr. Hussman:

Hang In There; Ignore Daily Noise and Focus on Longer Periods, Where We Can Be More Predictive.

A notable feature of many bull market peaks . . . is an extended period of churning over several months or even quarters . . . the apparent resilience of the market following interim corrections around those tops produced a sense of security and complacency despite what would prove to be profound downside risks. . . . The interim sense of security may be illusory, but it certainly contributes to frustration and impatience if investors don’t recognize this pattern.

So, if I am reading this correctly, succumbing to the short term siren call of an ever-rising market will end with me banging my head against a wall saying, “What was I thinking?”

* * * * * * * * * * * * * * * * * * * * * * * * *

Well, as evidenced by the fact that I am here writing his absurdly long and highly irrelevant post, we did make it out of the ITCZ and picked up the trade winds, and then things changed; it was great. There is a reason that the journey west from the time you pick up the tradewinds to the Marquesas and on to Tahiti and Fiji is known as the “Downhill Run;” it was a magnificent run – a once-in-a-lifetime experience.

I would stand on the deck as we raced along, sometimes as fast as seven knots, with the wind and the spray and the beautiful blue all around, and, as the sun disappeared (which happens almost instantly near the equator), I would understand Tennyson’s Ulysses:

The lights begin to twinkle from the rocks:
The long day wanes: the slow moon climbs: the deep
Moans round with many voices. Come, my friends,
'T is not too late to seek a newer world.
Push off, and sitting well in order smite
The sounding furrows; for my purpose holds
To sail beyond the sunset, and the baths
Of all the western stars . . . .

Was it truly a once-in-a-lifetime experience?

What should I tell Thurgood? Should I do it again?

* * * * * * * * * * * * * * * * * * * * * * * * *

Hussman says stay the course; be cautious; be conservative:

[O]our present estimate of 10-year prospective S&P 500 total returns is now less than 2.9% annually (nominal), and those estimates have been quite accurate historically . . . . The prospects for reasonable 10-year returns are now long gone.

. . . I expect that investors will ultimately look back at the present QE-induced euphoria and ask the same question: “What were we THINKING?”


This is reasonable and careful; I admire that in an advisor, and I admire that as an investment philosophy.

I am not so sure that I admire it as an approach to life. The Southern Cross beckons.

We shall see . . . .

Rich

A Drumlin Daisy

2 Comments – Post Your Own

#1) On July 24, 2013 at 2:39 PM, ryanalexanderson (< 20) wrote:

So we cheated and we lied and we tested

And we never failed to fail, it was the easiest thing to do

You will survive being bested

Somebody fine will come along and make me forget about loving you 

...and the Southern Cross 

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#2) On July 30, 2013 at 3:12 PM, APJ4RealHoldings (33.63) wrote:

What a longwinded waste of time to state nothing but an opinion

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