Intelligence and Successful Investing Don’t Always Correlate

By Eric Nelson

In the preface of the Fourth Edition to Benjamin Graham’s The Intelligent Investor, Warren Buffet writes, “To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information.”

Yet investors often search out the smartest, most educated investment professionals to manage their money, hoping to capitalize on information or research that no one else has.  An example of one such professional is Dr. John Hussman.  He is the president of Hussman Econometrics Advisors and manages the Hussman Funds.  He holds a Ph.D. in economics from Stanford and a Masters degree from Northwestern University.  Pretty impressive stuff!

As an investor, Dr. Hussman has a very complex approach to “investing for long-term returns while managing risk”.  His website says their key elements in evaluating securities and market conditions are “valuations” and “market action”.  “Each unique combination of these conditions results in a distinct Market Climate, with its own profile of expected returns and risk”.

With this combination of investment intelligence and complex market modeling, it’s logical to assume Hussman investment portfolios have prospered as an incredibly volatile stock market has offered ample opportunity for investors and money managers to jump in and out of stocks for maximum gains with minimal risk. 

At the very least, we’d assume Hussman portfolios provided considerable value compared to us investment simpletons, who believe that markets are largely efficient and unpredictable, and after developing a broad-based index or asset class portfolio, think it’s better to just stay the course.

Table 1: Annualized Returns Through 2/28/2013






Since 8/00

Since 10/02

Hussman Strategic Growth Fund







40/60 Asset Class Index














Hussman Strategic Total Return







20/80 Asset Class Index







But Table 1 indicates otherwise.  After a strong showing in the bear market of 2008, where the Strategic Growth fund only lost 9% and the Strategic Total Return fund gained 6.3%, Hussman and their models appear to have completely missed the recovery.  In the last 3 years, Strategic Total Return earned only 3%, while Strategic Growth actually lost 6% per year.  Over the last 10 years, their returns average out to a little under +4%—about a percent less per year than simply owning the Vanguard Total Bond index with no stock market risk at all. That’s the problem with market-timing and active management; you have to know when to get out and when to get back in.  Getting only one of those correct is often worse than not trying to guess in the first place.

An alternative to this actively managed approach that is not dependent on forecasting future market cycles and climates, is to simply build and maintain a broadly diversified asset class portfolio of stocks and bonds geared to a particular level or risk and expected return.

In 2008, the “40/60 Asset Class Index”, a combination of large/small and growth/value indexes in US and foreign markets with 60% in 5YR T-notes to dampen risk, lost 9.5%, in-line with Strategic Growth.  The “20/80 Asset Class Index” held the same indexes, but only 20% in stocks and 80% in 5YR T-notes, and in 2008 gained almost 2%.  Both allocations were simply rebalanced back to target once per year on January 1st.

The difference, however, was by not trying to time the market with elaborate hedges and short strategies, the Asset Class indexes instead maintained enough high-quality fixed income to offset some of the equity declines during bear markets.  They also remained invested in stocks to various degrees at the same time, so when markets recovered they were well positioned to capture the positive returns as well.  The combination of the 20/80 and 40/60 versions earned over 8% per year, or about double the Hussman approach, without taking on additional risk.

But even the reported Hussman returns overstate the results investors actually achieved in their funds.  Trying to outsmart the markets, Morningstar reports that the investor’s dollar-weighted return in the Strategic Growth Fund over the last 10 years was actually -2.8% per year, and only +3.3% for the Strategic Total Return Fund.  How could that happen?  During the bull market of 2003-2007, investors had little interest in Hussman’s “risk-management”.  Instead, they tended to buy these strategies only after stocks had fallen in 2008 and they were seeking refuge from further losses.  As markets recovered, they were poorly positioned to benefit from the unexpected stock gains.   Between the two funds, investors averaged only about +0.5% per year in returns, a result that could have been exceeded simply by sitting in a risk-free money market account for the entire period!

This isn’t a plug for bond-heavy portfolios; each investor should have an allocation that makes sense for them.  And we’re not picking on Hussman either, their funds and their approach simply offer an example of how even the most intelligent and sophisticated approaches to investing often don’t lead to successful outcomes. 

Instead, it’s important that investors heed the rest of the Buffet quote we opened this article with, “What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework”.  In other words: adopt an asset allocation based on your objectives, diversify broadly and target the recognized sources of expected return including smaller and more value oriented stocks, stay with your plan even when circumstances seem at odds with your approach, and don’t assume that above average intelligence or sophisticated models offer any reliable improvement in your odds of success.  That’s the smartest advice we can offer.



Source: DFA Returns Program 2.0;;

40/60 Asset Class Index= 8% S&P 500 Index, 8% DFA US large value index, 12% DFA US small value index, 4% DFA international large value index, 4% DFA international small value index, 4% DFA emerging market value index, 60% Ibbotson 5YR T-Note index, rebalanced annually

20/80 Asset Class Index= 4% S&P 500 Index, 4% DFA US large value index, 6% DFA US small value index, 2% DFA international large value index, 2% DFA international small value index, 2% DFA emerging market value index, 80% Ibbotson 5YR T-Note index, rebalanced annually

Past performance is not a guarantee of future results.  The returns and other characteristics of the allocation mixes contained in this article are based on model/back-tested simulations to demonstrate broad economic principles.  They were achieved with the benefit of hindsight and do not represent actual investment performance. There are limitations inherent in model performance; it does not reflect trading in actual accounts and may not reflect the impact that economic and market factors may have had on an advisor’s decision-making if the advisor were managing actual client money. Model performance is hypothetical and is for illustrative purposes only. Model performance shown includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. Advisory fees and other expenses incurred in the management of portfolios would reduce client investment results.  Indexes are not available for direct investme


Eric Nelson is a CFA charterholder who has worked in the investment industry for 15 years.  He is the co-founder of Servo Wealth Management, an independent RIA in Oklahoma City, Oklahoma.  Eric has a passion for educating investors about how capital markets work and helping his clients achieve and maintain financial independence while “simplifying complexity”.  Eric’s research and commentary on investing can be found on his website  at the “Servo Thoughts” blog and the “Factors in Focus” newsletter.



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