Next stock market crash to result from huge investing mistake: Hussman

Reuters / Cheryl
Ravelo-Gagalac

• John Hussman, the outspoken investor and former
  professor who has been predicting a stock market crash, calls
  out a big mistake he says investors are making as valuations
  continue to climb.
• He sees this dynamic specifically playing out in the
  tech sector, which has been largely responsible for market
  gains in recent months, leaving them that much more
  vulnerable.

In the stock market, the concept of
valuation can mean different things, depending on the investor.

To novices, it’s frequently used as a simple barometer of when an
investment gets overextended. Conventional wisdom there suggests
once valuation gets stretched too far, it might be time to sell.

But to seasoned experts like John Hussman — a former economics
professor who is now the president of the Hussman Investment
Trust — assessing valuation is more nuanced.

He subscribes to what he calls the Iron Law of Valuation, which says the higher
the price investors pay for future cash flow, the lower their
long-term investment returns will be. In other words, if you
arrive late to the party, don’t expect to get the full
experience.

It’s a relatively basic concept that informs Hussman’s view that
irrational investor behavior will eventually lead the market to
its doom. Piggybacking off the Iron Law, he points out that as
prices have surged, people still seem …

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