Are bulls really just sheep?

The trouble with bull markets is that they are not investment fests, they are social events

Many folks think finance professionals like bull markets. Some do. However, I can’t abide a runaway bull market for more than the concern that a tab is being quietly built up in the ether.

In 1999, feeling battered after treating the 1998 crash as a midcycle correction, I spent a week on a friend’s ranch. Doing rounds in a bakkie, we stopped to look at something nondescript in a field. Some sheep trundled over, thinking a treat was being dished out. Others followed. By the time we had driven on, several hundred sheep were thundering down the hillside, looking for a treat that wasn’t there. Shades of some bull markets I’ve seen.

The trouble with bull markets is that they are not investment fests, they are social events. Tales of derring-do and “hot tips” abound. Novices become black belts. (Were buyers of GameStop at $300 that clever? Those who got the heads-up at $30 were early, not clever. Only the ringleaders who choreographed the whole thing were savvy.) Worst of all is the welcoming of dips as an opportunity to join the party. “All it takes is nerves of steel,” the black belts cry, “to double up into dips and go big or go home.” Like Pavlov’s dog, they are conditioned to start drooling every time the bell rings. Was his name Hodl perhaps?

I’m against market timing because difficult to get right — and expensive to get wrong. Mean reversion thinking is hardwired into humans. What goes up must come down. Right?

Often great fund managers get out too soon, to the detriment of their business. In a bull market, a fund manager who is underinvested sheds mandates faster than a cat loses its winter coat.

“Long-term” becomes a month. Nobody wants to hear about value, they want to hear about action and growth. During bull markets as a stockbroker, I signed up new accounts with limited effort. The trouble with newbies is that they swamp the market’s “memory”. They have no fear of risk. Risk is deceptively high in a bull market, because the trend disguises a portion of it.

Because of the sociable nature of the bulls, “tipping” picks up. Markets are more efficient when there are more participants efficiency and investment merit are different things.

Are there grounds to be bullish? Recent rebounding SA and global macroeconomic data reflect the fallout from Covid-19, lockdowns and, locally, the credit rating downgrade. If you think of shares as variable coupon bonds, then yields as against cash are less demanding than history suggests. Central banks are in liquidity creation mode, and negative real interest rates are equities supportive. In selecting cash over shares, you would be committing to guaranteed losses in the short term. Economies are recovering from severe lows; it takes a brave bear to naked short economic recovery.

There are always reasons to be bullish or bearish. People cherry-pick logic to validate their own conduct. All that is required for irrational exuberance is sustained behavioural error.

Does this mean one shouldn’t play in a bull market? No. You must pick the right sector, then nearly outstay your welcome. The bull market of 2020 was almost overwhelmingly infotech/ biotech/health care; everything else got murdered. Some will never recover. but when you have thrown the baby out with the bath water, pick that baby up.

You might look at the behaviour of investors and say “surely that’s evidence of a bubble?”. But in the case of 2020, being cooped up indoors with stimulus cheques that weren’t means-tested was always going to lead to some mucking about.

Emerging markets, some commodity plays, SA Value and SA Bonds seem to offer reasonable risk/reward profiles. Prudent diversification should not be forgotten. ●

“Long-term becomes a month. Nobody wants to hear about value, they want to hear about action and growth