ANIMALS TO MARKET

The bulls, bears and bugs of Bay Street.

The emails started pouring into David Rosenberg’s inbox almost immediately. Few of them were kind. It was the spring of 2012 and the so-called permabear, an investor who is permanently pessimistic, had just upgraded his outlook for the U.S. economy. Not only that, the chief economist and strategist at Gluskin Sheff + Associates Inc. soon began recommending investors buy more stocks at the expense of U.S. treasury bonds.

After years of steadfastly suggesting the opposite, Mr. Rosenberg’s aboutface was like a punch in the face for his legion of die-hard followers. Even worse, it was a betrayal.

“Put it this way, there was nobody in the bullish camp sending me emails congratulating me for finally seeing the light,” he recalls. “Instead, I was swamped with emails from readers [of my reports] who were irate, and I’m not exaggerating when I say that. It was as if I had changed religions. It was that intense, that passionate, that emotional.”

There’s something very troubling about investors who consider a market call, whether bullish or bearish, absolute doctrine that can never be altered or compromised in any manner.

Conviction is a necessity to sound investing, but so, too, is the ability to adapt as market conditions change over time.

But it’s perhaps not surprising that Mr. Rosenberg would elicit such a venomous response. He has been a polarizing figure in the investing world for more than a decade, one of the few in a buy, buy, buy kind of industry telling people to be cautious.

In many ways, he became the poster child for pessimists around the world and they clung to his every word, firm in the belief that he was one of them.

But in all those years of being down on the U.S. economy, Mr. Rosenberg never considered himself a permabear. He hates the label and believes most people who took his work seriously knew that his goal was to find ways to preserve capital and make money in a prudent fashion.

Of course, that clearly did not apply to those who felt betrayed when he changed his mind. Studies have shown that we are more forgiving of people who share our biases and unforgiving of those who do not, regardless of whether that is rational or not.

“There are huge consequences to hanging on too tight to pre-existing biases, in life in general, but specifically in financial markets,” says Amos Nadler, assistant professor of finance at Western University’s Ivey Business School in London, Ont.

He points to a classic piece of behavioural economics known as confirmation bias that suggests we disregard or discount new information that contradicts our prior beliefs, regardless of its legitimacy.

“If you are not encoding the signals that something is turning in the other direction, that can be a very costly mistake.”

The problem is that we are all guilty of doing just that and nowhere in capital markets is the dogmatic tendency more evident than it is among gold bugs.

They believe the precious metal is the true measure of wealth and that it is a moral imperative to return to the gold standard, where currencies are based on a fixed quantity of gold, in order to prevent governments from printing too much money.

At the fringes, this belief is layered with conspiracy theories, which include, among other things, the manipulation of precious metal prices and the supposed disappearance of a pile of gold held by the U.S. government at Fort Knox.

“There is a lot of emotion associated with gold,” says Nick Barisheff, chief executive of Bullion Management Group Inc.

Well known for a very bullish US$10,000 call on the asset class, Mr. Barisheff says there are legitimate reasons to believe in higher gold prices, including its performance since the gold standard was abandoned in 1971.

“If we look from that time on, gold has been the best-performing asset class 14 times, equities 13 times, bonds 12 times,” he says. “When you look at those numbers, is it rational to hold no gold? Why would you ignore it? It’s ludicrous.”

But he does not want to be known as a gold bug, even though few echoed his US$10,000 call. The label, he says, has lost credibility because it too often unfairly pigeonholes gold believers as being irrationally exuberant. Others might call them downright crazy.

Russ Koesterich, chief investment strategist at BlackRock Inc., knows all too well the emotion that gold can bring out.

In 2012, when gold was in the throes of a bull market, he received several negative emails after briefly mentioning in a blog post that a return to the gold standard was probably not possible.

“I got vaguely threatened,” he says. “I don’t remember exactly, but the gist of one was something like, ‘The revolution is coming and the train is going to run you over.’ ”

He says most investors don’t get that passionate, nor should someone ever be so enamoured by an idea that it paralyzes their ability to think objectively.

He describes himself as an equity bull at the moment, but a nervous one who goes home at night with a lot of reasons to be bearish.

“It’s hard because things are not a screaming buy right now and the bull is long in the tooth,” he says. “At some point in the next six to 12 months, I’m going to have to change my position. You can’t be ideological about it. When the facts change, you have to change with them.”

If anything, he thinks it’s easier for a bull to change tack than it is for a bear, particularly in an environment of ultra-loose monetary policy.

“More often than not, I’ve represented the bullish side, but I think for someone like David [Rosenberg], because he had been the voice in the wilderness for so long and he’s very articulate, I could see the feeling of betrayal.

“There are a lot of skeptics out there who think this is all cheap money and that we’re headed for Armageddon. David was somewhat sympathetic to that view,” he says.

For his part, Mr. Rosenberg believes he became a security blanket for people who see a crisis around every corner.

“The bear side has more of a fanatic fringe to it than the bullish camp. To be a constant bear is like Red Sox Nation; it’s something to be proud of,” he says. “When I changed views, my friends and colleagues on the more bearish side of the equation were up in arms. I can’t describe it. It was a learning lesson in human behaviour.”

Part of the adverse reaction was no doubt brought on because Mr. Rosenberg was a bear on the U.S. economy and equity markets for so long, starting in 2000 at the cusp of the bursting tech bubble right on through the financial crisis until early last year.

“It was never about being bullish, bearish and agnostic or worried about the labels,” he says. “Was I bearish for a long time? Yes. But am I a permabear? No.”

He says it’s absolutely essential to walk the line between having conviction and being accepting of evidence that tells you that you are wrong.

Admittedly, that’s easier said than done. In retrospect, Mr. Rosenberg wishes he had turned more bullish sooner than he did and thinks there is a level of self-fulfilling prophecy at work when comes it to the bull/bear dynamic.

“There are people out there who have been bearish from the time I met them 30 years ago,” he says. “It’s like John Wayne only does westerns or Al Pacino only does gangster movies. At some point, it can become part of you.”

Today, Mr. Rosenberg is more often than not referred to as the former permabear, which is, of course, an oxymoron. But in time, he hopes to finally shed that label for a more flattering one that is more attuned with his intentions.

“I want to be the guy who is known as the thoughtful analyst who is going to make me money,” he says. “That’s who I want to be.”