Christmas week must read: ‘Three Delusions’

John Hussman has written a particularly valuable piece this month in Three Delusions: Paper Wealth, Economic growth and Bitcoin–and how they are all connected. A synthesis of key takeaways from history, fundamental analysis, technical analysis, macro perspective and human behavior around saving and speculation.  This is no Tweet-sized bite.  The article is longer, but well written and worth printing and highlighting for increased digestion.

Hussman includes the below quote from Graham and Dodd– the so-called founding fathers of security analysis–which the investment world pretends to espouse, while conveniently ignoring, in pursuit of product sales at every price.  The real life carnage that follows, is never their concern.  This is why individuals must enlighten and discipline themselves, as we work through another 1929-style capital risk environment today:

“During the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude towards the investment merits of common stocks… Why did the investing public turn its attention from dividends, from asset values, and from average earnings to transfer it almost exclusively to the earnings trend, i.e. to the changes in earnings expected in the future? The answer was, first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring…

“The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. Yet the new-era theory led directly to this thesis… An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.”

Benjamin Graham & David L. Dodd, Security Analysis (1934)


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