http://usmarket.seekingalpha.com/article/26769 Excerpt from fund manager John Hussman's weekly essay on the U.S. market: Let's play a little game â it's called âBaron Rothschildâ -- who once said âI made my fortune by selling too earlyâ (a comment also made by Bernard Baruch)... Suppose that the dealer lays cards down, one after another. Each is an annual market return. At any time, you can call out âBaron Rothschildâ and go to a defensive position, or you can gamble and get the entire market return the dealer shows next. The gain cards read, say, 15%, 20%, 25% and 30%. If you're defensive, you lag the market by 10% when the market return is a gain, but you get, say, 5% if the market return is a loss. There is one -20% loss card. Once it appears, the game ends and everyone counts their dough, compounded. It turns out that if the loss comes anytime before the 5th card, you're almost always ensured to beat or tie the dealer by immediately blurting out âBaron Rothschildâ even before the first card is shown. For example, 20%, 20%, 20%, 5% beats 30%, 30%, 30%, -20% 15%, 15%, 15%, 5% beats 25%, 25%, 25%, -20% 20%, 10%, 5%, 5% beats 30%, 20%, 15%, -20% 5%, 5%, 5%, 5% ties 15%, 15%, 15%, -20% You can easily prove to yourself that even for a six-year market cycle, you still generally win even if you call out âBaron Rothschildâ after year two. It just doesn't pay to risk the big loss. The point of this isn't that investors should always take a defensive stance -- some market conditions are associated with very strong return/risk profiles that warrant substantial exposure to market fluctuations. The point is that the avoidance of significant losses is generally worth accepting even long periods of defensiveness. Because of the mathematics of compounding, large losses have a disproportionate effect on cumulative returns. Remember that historically, most bear markets have not averaged 20%, but approach 30% or more. A 30% loss takes an 80% gain and turns it into a 26% gain. It's difficult to recover from such losses, which is why the recent bull market has not even put the market ahead of Treasury bills since 2000 or even 1998. So again, the point is that the avoidance of significant losses is typically worthwhile even if, like Baron Rothschild, one is defensive "too soon." With regard to present stock market conditions, it would take a correction of only about 10% in the S&P 500 to put the market behind Treasury bills for the most recent 3-year period. That's not an empty statistic given rich valuations, unusual bullishness, overbought conditions, rising yield trends, and a market long overdue for such a correction. Given the average return/risk profile those conditions have historically produced, it makes sense to call out "Baron Rothschild" even if we allow for the possibility of a further advance, in this particular instance, before the market inevitably corrects.