Bear Calls are the Hardest (and Easiest) to Make
- Joshua M Brown
- May 27th, 2012
I was talking to a friend who doesn't work on Wall Street but consumes a lot of financial television (in lieu of condolence cards, just plant a tree for him or something). He was like, "Dude, let me ask you a question, why don't you just always be bullish when you go on TV? Stocks always go up over time, right?"
So I explain to him that I'm always bullish on something - even if its bonds or cash or a specific type of stock - this blows his mind, most people who don't manage money haven't thought about the concept of asset allocation very much.
But he makes a good point. 70% of the time, US stocks go up. I'm not sure where that stat comes from or which index or time frame its based on (S&P? Daily or Monthly?) but I believe it to be true. I think most people do.
So if the odds are against you in making cautious or even bearish calls, why does anyone even bother? A few reasons, I think:
1. There are few things more intellectually satisfying than spotting danger in the market and having whisked your capital to the sidelines in advance. It's not so much the joy in seeing other people lose money (unless you're a sicko), it's more the sense of command and perspicacity one feels at having done "the smart thing" while so many others haven't.
2. Also, the feeling of being cash-heavy in a downtrend is second only to the feeling of being able to tell people that you're cash-heavy in a downtrend. You almost can't help but mention it during every discussion about "how bad things are." I'd imagine the pleasure center in your brain that gets tickled by telling people "why I got out" is similarly affected by other forms of masturbation.
3. While the risk of the market rising is, all things being equal, asymmetric with the risk of it falling, the reputational risk is about even. In other words, yes you look like a loser if the market runs up and you're not keeping up with the benchmarks - but you look just as stupid being fully invested in a sell-off. So putting aside your actual positioning, just think about the optics of discussing a portfolio with colleagues, clients or in public - better to not be the most long, most bullish mouthpiece on the air or in the room.
4. You can always be wrong and get into a market late with very little humiliation. Much harder to backpedal excessive bullishness in the wake of a sell-off. "I was waiting for the confirmation I needed to get more constructive and do some buying." Learn that phrase, it's much easier than saying, "In hindsight, I didn't count on negative items A, B and C."
5. One other thing about bearish calls is that they have a longer shelf life than bullish calls - you can continue to call for the next crisis for longer than you can say, with a straight face, that a declining stock or index is "cheap" or "undervalued." Who looks dumber, the value guys who bought and held onto Eastman Kodak for the last ten years or the guys who have continued to predict a revisit of the March 2009 lows for the market? No one wants to publicly ridicule a bear who's been wrong, it's bad juju and will most assuredly lead to the next crash happening if too many people do it (you see how scientific I'm getting here).
6. Bear calls always have and always will attract attention, because of our fight or flight response. If someone near us raises an alarm, we are helpless as homo sapiens to ignore it, we must take notice of it and evaluate whether to run away or make a fist. This shit goes back to the paleolithic, B. Saying that "things won't be easy but are going to gradually turn out okay," might be a rational statement, but you certainly aren't getting booked for many media appearances any time soon. Marc Faber understands this concept intuitively. I am certain he is paying his bills on time and making plans to do things with his family, he knows that everything will be alright in the end. So you gotta assume that he is a smart man going about his punditry business on a whole 'nother level when he says things like "100 percent chance of a global recession" as he did this week. Really, it's genius; no one will ask him about it again because his next round of appearances will include an even more clever way of scaring everyone - thus trumping (and overshadowing) this call.
Anyway, that's my cynical take on why bear calls are pretty easy to make after all, even despite the generally upward trajectory of stocks over the decades. A lot of this is more about perception than the reality of how much money is actually being made - but then again, you knew that already.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.