Bears, bulls, pigs, wolves — and all the other investors we know
• Success or failure on the equity markets can be directly linked to the animal trait one adopts
Stock market analysts, commentators and other pundits have come to rely on the traits of familiar animals to succinctly describe the different “species” of market participants and capture the “animal spirit” that supposedly drives them — albeit not always in the right direction.
Among the more popular of these, we find:
● Bulls and Bears: “If you are cheering it one way, there is always somebody else cheering it just as hard that it will go the other way.” — Marty Schwart
The bull depicts investors who are optimistic about the future prospects of the market and believe an upward trending market is under way. The polar opposite is the bear; an investor who is convinced the market is headed for a fall.
As James Montier suggests: “We need to stop pretending that we can divine the future, and … concentrate on understanding the present and preparing for the unknown. There is a simple, although not easy alternative (to taking a bullish or bearish position)… Buy when an asset is cheap, and sell when an asset gets expensive. Valuation is the primary determinant of longterm returns, and the closest thing we have to a law of gravity in finance.”
● Stags: “The Italians say it is not necessary to be a stag; but we ought not to be a tortoise.” — Benjamin Disraeli
These market players are not interested in a bull or bear run. They would rather attempt to profit from short-term market movements by darting in and out of positions.
This analogy commonly applies to those who buy the shares of a company’s initial public offering, expecting the price to rise immediately upon the start of trading.
Unfortunately, as someone (no one seems too sure who) pointed out: “The system wasn’t designed so that most people could beat it!”
● Chickens: “Stop thet! Stop thet! Yer s’pose to be dead, ya… a dumb headless thing.” — Janette Oke.
Chickens are those individuals who are so afraid of a loss that it prevents them from taking a reasonable risk. Rather than invest in stocks, for instance, they will stick to more conservative instruments such as bonds, or stay in cash.
For those who deride a chicken’s fears, however, David Foster Wallace had this story: “… every morning, the farm’s hired man’s appearance in the coop area with a certain burlap sack caused Mr Chicken to get excited and start doing warm-up pecks at the ground, because he knew it was feeding time. It was always around the same time every morning, and Mr Chicken had figured out, man + sack = food, and thus was confidently doing his warm-up pecks on that last Sunday morning when the hired man suddenly reached out and grabbed Mr Chicken and in one smooth motion wrung his neck, put him in the burlap sack and bore him off to the kitchen.”
Stock market investors have similarly been “well fed”, in the form of good returns for some time now.
● Pigs: “I am fond of pigs. Dogs look up to us. Cats look down on us. Pigs treat us as equals.” — Winston Churchill.
The polar opposite of chickens, pigs embrace risk. Pigs are thought to be greedy, impatient and emotional; lazy animals that hate work and would rather trade on tips than do their own analysis, traits it’s assumed must invariably lead to financial loss. Hence the refrain: “Bulls make money, bears make money, but pigs get slaughtered.” It’s a warning to investors against excessive greed.
Churchill wasn’t the only one who likes pigs. Warren Buffet approves of piggish behaviour too. That’s right, the same Buffett who refers to fear and greed as the “two super-contagious diseases that will forever occur in the investment community”, is often quoted as saying: “I will tell you how to become rich. Close the doors … be greedy when others are fearful.”
“It takes courage to be a pig,” says Stanley Druckenmiller. “And I strongly believe the only way to make long-term returns in our business that are superior is by being a pig.” So much for the maxim that pigs get slaughtered. As it turns out, some pigs make money too — and lots of it.
● Sheep. “It is better to live one day as a lion than 100 years as a sheep.” — Benito Mussolini.
Like the sheep, this type of investor is a follower, relying on a shepherd for guidance; shepherds that come in the form of financial pundits, the latest trend or market story.
In 2006, Amil Dasgupta, AndreaPrat and Michela Verardo, who were then at the London School of Economics, looked at how likely fund managers are to follow (or conform). They called this measure the sheep index, and found that about three quarters of institutional investors display a positive sheep value.
As Ben Graham pointed out, it requires considerable willpower to keep from following the crowd. For those who are not convinced it’s the wrong thing to do, Paul Merriman of Merriman Incorporated compiled a check list for sheep investors that began with investing most of your equity holdings in large, well-known companies in the belief that they are more profitable and safer long-term investments than small companies, “despite the fact that from 1926 to 2004 US micro caps returned 13.1% versus 10.4% for large-cap stocks”.
● Wolves. “If you live among wolves you have to act like a wolf.” – Nikita Khrushchev
While the term wolf has not yet gained traction as financial slang in its own right, the animal, and its wider figurative reference to rapacious behaviour, is often used as an analogy to powerful individuals who are willing to resort to unethical behaviour to make money. A recent example was Jordan Belfort, who was depicted in Martin Scorsese’s 2013 film The Wolf of Wall Street. A popular one-liner to come out of the film that neatly sums up the wolf’s credo is Belfort’s advice: “If you don’t think money’s everything, go work at McDonald’s.”
● Ostriches. “In the land of the ostriches, the blind are king. — Erik Pevernagie
Behavioural economist George Loewenstein of Carnegie Mellon University coined the term “the ostrich effect” to describe the way investors stick their heads in the sand during bad market moves in the hope their portfolio doesn’t get badly hit.
“After all, if you don’t know for sure how your portfolio did, you can always retain the hope that it somehow fared alright.” (Not often the case.)
Still, it’s hard to see the difference between the ostrich’s absurd behaviour and that of the long-term investor who, come what may, stays fully invested in the belief that in time the market will always recover.
THE WOLF’S CREDO IS: IF YOU DON’T THINK MONEY’S EVERYTHING, GO WORK AT MCDONALD’S