Deal­ing with ‘pro­fes­sional bears’

There are many pes­simists in the in­vest­ment world – those who are con­stantly ex­pect­ing global mar­kets to col­lapse. What can we learn from them?

Finweek English Edition - - MARKETPLACE INVEST DIY - By Si­mon Brown ed­i­to­rial@fin­

last week­end I met a pro­fes­sional bear. No, not a bear like you’d find in a zoo, cir­cus or out in the wild – I mean a mar­ket bear; some­body who thinks the mar­ket is just one mo­ment away from a com­plete col­lapse that will re­sult in the end of fi­nan­cial mar­kets. Most specif­i­cally, this is some­one who has been think­ing and talk­ing about this for close on 15 years, hence the “pro­fes­sional” part.

This got me think­ing about a lot of things. First, I call him a pro­fes­sional bear as he has been bear­ish since 2002 and ev­ery­thing he ever writes or says is bear­ish. He has never is­sued a buy rec­om­men­da­tion, ex­cept for gold – but more on that later. He has spent his en­tire life as an in­vestor pre­dict­ing the end of the world, and so far, he has been wrong. Sure, there was the 2008/09 global fi­nan­cial cri­sis when he was right for a while, but only partly right as things got bet­ter in the end. He has spent the past eight years since the end of that cri­sis say­ing that it was just the warm-up and that even worse mar­ket crashes are com­ing.

Now, of course, you may recog­nise that in essence I am a “pro­fes­sional bull” in that I am pretty much con­fi­dent about mar­kets. Sure, they col­lapse ev­ery so of­ten and the crash in 2008/09 was a bad one. But over time mar­kets move higher and we have plenty of ev­i­dence for this state­ment. Tak­ing it a step fur­ther, mar­kets move higher by de­sign. In­fla­tion helps com­pa­nies im­prove prof­its and hence share prices, the loser stocks go bust and/or exit the mar­ket while the new win­ners rise to the top. There is a built-in bias for mar­kets to move higher over time.

But none of this dis­cour­ages our pro­fes­sional bear. He writes books that have a large and ea­ger mar­ket. He goes on TV telling any­body who’ll lis­ten about the dark times ahead. And, of course, he is telling every­body to buy gold. But he is to­tally mis­taken about gold. Dur­ing the 2008/09 cri­sis, the yel­low metal went down as the panic caused every­body to sell ev­ery­thing, even gold. Sure, it did fi­nally move higher and peaked in Au­gust 2011. But as an in­vest­ment, gold has been mod­est at best; hor­rid most of­ten.

My com­ment to him is that if the end of the fi­nan­cial world were to erupt, surely gold would also be use­less. Who wants heavy, hard yel­low stuff to carry around? Value would be in water, seeds and maybe guns and am­mu­ni­tion. Ser­vices would also be use­ful, peo­ple who could fix things, grow things and make things. This could all be bartered for food or shel­ter. No­body would need gold.

The point of me re­lat­ing this meet­ing is that he is but one of many pro­fes­sional bears. There is an en­tire in­dus­try that op­er­ates on such doom-and-gloom pre­dic­tions. Oc­ca­sion­ally they are right, such as in 2008/09. But gen­er­ally, they are not.

Our best re­sponse is to let them buy us a beer or cof­fee, lis­ten to their story and then do noth­ing. The pro­fes­sional bear al­ways sounds scary and is al­ways con­vinc­ing, but they are also al­ways wrong in the long term.

So, do not model your port­fo­lio on the ad­vice of a pro­fes­sional bear. Do not sell ev­ery­thing and move into cash or gold be­cause a pro­fes­sional bear scared you. Re­mem­ber, mar­kets move higher over time and while they do crash ev­ery so of­ten, no­body has a track record of ac­cu­rately pre­dict­ing a crash. Call­ing a crash ev­ery day and then when it even­tu­ally hap­pens claim­ing you were right, does not make you an ex­pert in call­ing crashes. It makes you a pro­fes­sional bear. ■

Do not model your port­fo­lio on the ad­vice of a pro­fes­sional bear. Do not sell ev­ery­thing and move into cash or gold be­cause a pro­fes­sional bear scared you.

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