RISK MANAGED OPTIMISM…
It’s funny being someone who isn’t always bearish. When I am a bear I seem to garner a lot more attention, website traffic is better, etc. And when I turn bullish I seem to make a lot more enemies, website traffic declines, etc. I don’t know what it is about being negative, but people seem to embrace it in the investment world. The strange thing here is that it’s the perseverance and optimism in people’s ideas and production that generally drives wealth creation so there’s an odd sort of contradiction in this form of permabearish thinking coming from supposed capitalists.
Obviously, I am not the most optimistic guy in the world (my macro outlook over the last 5 years hasn’t been exactly rosy), but I would characterize my thinking as “risk managed optimism”. I’ve previously used the investment analogy of climbing a mountain with the understanding that we’re all trying to get to the top. So you have to be optimistic during this climb. You have to always persevere and always make progress. But if you just sprint up the mountain you’re bound to slip up if you’re not careful. You can’t always focus on the beautiful parts of the climb because it’s not the pretty flowers that slip you up. It’s the loose rocks. So your approach should be optimistic, but measured. You have to manage the risks on your way up because the mistakes can potentially kill you (literally if you’re mountain climbing). But a permanently pessimistic perspective will guarantee failure.
Anyhow, I won’t bore you with my philosophy on investing, but I really liked this portion of a Yahoo Finance article:
And…the top reason for being bullish:
- 1. “The end of the world only happens once – Monday probably isn’t the day.” Through recessions and depressions, flashes and crashes, we seem to persevere. “For all the well-publicized challenges facing markets and investors, financial Armageddon is still an unlikely occurrence,” Colas writes. “And even if it does happen, what are the chances you really have enough gold coins, freeze-dried food and double-aught buckshot anyway?
“It is OK to prepare for disasters; just make sure you plan for success as well.”
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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33 Comments
Your approach is refreshing. Don’t ever change.
Agreed, don’t take positions just to drive traffic. But on the other hand, don’t fall into the ‘centrist trap’ which so many do, namely that they feel they can never quite take a strong position either for or against something because that will make them less ‘sophisticated’. The most typical example is what Krugman calls ‘Very Serious People’.
The truth is that those people aren’t sophisticated at all – they are just scared of actually thinking through a position, and, if it leads to a place where they have to take a position which isn’t conventional, then they won’t and retreat back to “a little of this and a little of this” to cover every possible excuse.
The thing that is important now is that when you are indeed bearish, your readers know it’s genuine. Same is true for bullishness. But also please don’t ever stop taking a position which might actually place you in the bearish category when it’s popular. Independence should mean taking a position when nobody takes the same position, but it could also mean taking one which everyone else also takes(if you truly believe it) as well as anything inbetween.
KUTGW.
Well said, David
What I particularly respect Cullen for is that, regardless of his current position, he features articles that profess positions contrary to his. That shows to me that he is, while confident in his stand, also realistic enough to suggest he may be wrong.
We don’t need to be right 100% of the time, help us to be right 55% of the time and we’ll all be millionaires.
And don’t ever sellout just to drive website traffic. Trust me, there are many of us who really appreciate the fact that you’re unbiased.
“The end of the world only happens once – Monday probably isn’t the day.”
I feel that is a straw man argument as bears do not intend to short the market to zero. Then again, if you are shorting individual stocks to zero, well, bankruptcies happen all the time.
“Through recessions and depressions, flashes and crashes, we seem to persevere.”
These are the events bears anticipate, not the end of the world. They are much more common. And the fact that there’s a recovery after the downturn does not mean the downturn cannot be used to make a profit.
I believe being “optimistic” and “pessimistic” are both equally incorrect, as those terms, to me, describe a permanent bias. Wouldn’t “realistic” be better? That realism may include acknowledging the fact that economies have grown over time. But it’s just one factor of many, and should not color your overall judgement.
Plus, growth is not guaranteed over the long term. I don’t think it makes sense to assume it, just because it has happened in the past. Not saying it isn’t likely, just that it’s something people take for granted and perhaps shouldn’t be.
It’s not that bears annoy me. I was bearish earlier this year after all. It’s the permabear attitude. There’s a huge audience out there just hoping for 2008 to repeat so they can get back in because they missed the run up. And they want the world to come crashing down again so they’ve pretty much been bearish for the better part of a decade and it’s resulted in a lot of mistakes. My point is to be more open minded, less reactive, more proactive, more flexible, etc.
I think we are basically in agreement. And I think you’re one of the more flexible and realistic fundamental analysts on the financial blogosphere. Most are at least somewhat biased and only produce analysis that fits their view. But I have seen you both bearish and bullish when the evidence supports it.
I have no problem with permabulls or permabears if they are honestly taking an objective look at the facts, and every time they reassess the situation, it leads them to the same bullish or bearish conclusion. These are a minority though, I’m guessing. Most are probably victims of some kind of cognitive bias or political/moral issues.
The idea that a permabear wants to get back in at lower prices is pure fantasy, even if that’s what they say now. What happens is that they put a price target of, say 900, on the S&P 500. Then when it goes to 1,000, they lower the target to 750. At 850, they lower the target to 500. And so on…they never actually buy back in. This is what we’ve seen in every bear market to pass and I expect you’ll see it in every bear market to come.
I feel we are in a secular bear right now, and while I don’t hope that 2008 happens again, I’m certain that it will as the fundamental problems that resulted in it have only gotten worse, and the tools that were used to end the last recession will be less effective the next time around. But I have no idea if it will happen in 6 months, or 10 years, and it’s quite possible the secular bear could end before 2008 2.0 happens. In the short term being a bull or a bear is pointless, the only way to make money is to trade as in a secular bear buy and hold is useless at best. I wish it was a bull market because I’m not a good trader, but I’m trying to get better…
You are right and wrong, paradoxically. People understand that nothing has changed since 2008, only they have got the QE1 and QE2, which actually prevent the markets of crashing again. That doesn’t mean the economy is better and people are better off after 4 years of monetary manipulation. My point is, the bearish economic sentiments are very reasonable, but the bullish perception is only about financial market. At the end, financial market don’t create any wealth, they redistribute the already existing wealth, and as you notice: “optimism in people’s ideas and production generally drives wealth creation” so the “odd sort of contradiction in this form of permabearish thinking coming from supposed capitalists” I think is absolutely understandable in today’s unstable and volatile global economic and political conditions with no prospect for new ideas and rules to take place of the failed old ones. Don’t mix financial sentiments with real economy, productive ideas and wealth creation. One can make a fortune on financial market during crashes as well as some can have a feast during the plague – it won’t create any new wealth.
After I have experienced enough set backs I have learned to become a realist. I calculate a worse case scenario. If i can’t live with that outcome then I don’t do it. It is true that I have passed up some really good possibilities.(maybe) But I know that I passed up more failures than good oppertunities. For me I know that to be a fact. Most people would like to be rich. But they don’t want to take the chance of ending up poor in the process.Fear will hold you back. But greed ultimately lead to failure.
Just my opinion
Well said Sergio.
My edge is that I know I have none thus I will act accordingly. From the stands I’ll be watching the Bulls and Bears go at it.
Well said Cullen. Optimistic yet realistic, with both feet on the ground.
+1
http://memegenerator.net/instance/22052901
You guys that are putting your hope, faith, and trust in Uncle Ben are going to be very, very disappointed…….
Please help me understand why?
Thanks,
NaE
The funny thing is that people keep on saying the current market preparing for ” end of the world”. A 11% correction and bounce back 1/2 already is good preparation of ” end of the world”? No, this market does not discount any bad case, it holds very well based on the illusion that sb will help.
I still remember a lot of headlines questioned Bernake out of bullet in the last 2 years big correction, do you see any headline talk about it this time? No, the only headline now is that ” when Ben will do it”,” do not fight Fed”. I feel more and more uncomfortable with this set up.
I agree with you.
Give all that has happened and the precarious position of the global economy and the DOW is still at 12,800 and the SP at 1343, only down 10% and 15% respectively off of their all-time highs….
And the 30 yr bond is at under 2.70%…..
Any every one says the Bears are irrational!
Random thoughts:
1. Nobody is a bear or a bull all the time.
2. If you are a bear on stocks, you are most likely a bull on something else, commodities or gold, most likely.
3. Almost every money manager is a bull, in my experience. If the market goes up while you are on the sidelines, you get fired. If the market goes down but everybody else is invested, too, you are safe.
4. Most investors are momentum chasers. The fundamentals of this economy aren’t good, which I believe most investors understand, but they’re all trying to front-run the Fed and then get out before the next guy.
5. Because most investors and managers are bulls, they tend to downplay the negative news and seize onto positive news.
6. I’m negative on the current stock market, but very positive about life, thank you very much!
I have been reading the brilliant but permabearish David Rosenberg for many years. Back in 2008 he called for a low in the S&P at 666 based on his valuation metrics (this call was made when the S&P was hundreds of points higher). The fact that 666 turned out to be THE low on the S&P 500 made it the perhaps the greatest market call of all time (or at least since I have been following the markets for over 3 decades.) Of course when 666 came , sadly for him he lowered his estimates. My point is that Cullen is exactly right, smart investors are proactive and flexible. Unfortuantely this is easier said than done, as being proactive often means buying when the news is horrible, and selling when the news is good (for traders, anyway.) As for blog traffic, I think the bearish arguments are just more intellectually appealing to many..and for whatever reason they seem more intellectually rigorous; but this is in reality a fallacy.
I’m pretty sure your bearish traffic have no interest in investing. If even one of them is 70-100% short their whole 401k for any significant period of time I’d be surprised.
With no end to ZIRP in the horizon, current equity valuations seem ok. However, there is no margin of safety built in. After a 7%+ return in 2011, with just a fraction of the market volatility, I am now easing back into a 30% WW equity position via cheap index ETFs with a bit of a value and size tilt at a 1%/month rate so it will take me 30 months! YTD I am down 0.75%, but the year isn’t half over yet. Last year I made my money over the summer months and October. The key is not being bullish or bearish but smart contrarian, stupid contrarian gets you killed. If a big enough deep happens, I will not hesitate moving away from my measured pace in Thr blink of an eye…
Interesting. After months of pondering what to do in this market environment, I decided on the same strategy that you outlined.
Most people are naturally critical, its called survival instinct. Even though people may seem critical, they may act otherwise. What people say is not how they act…..
Let me know WHY progress, i.e mankind evolution means markets up.
Because people wanting to leave the world a better, and more prosperous, place for their offspring has been going on ever since Man began walking upright. And, over the long term, people’s standard of living and the value of markets parallel each other, almost exactly.
Plus, you know what they say about inertia, “things that are in motion, tend to stay in motion.” And, since it’s been in motion for over 150,000 years, chances are that it will stay in motion at least as long as we posters grace this earth’s presence.
Everyone needs to watch this…
http://www.youtube.com/watch?v=7y2KsU_dhwI
Preventing a recurrence of those historical events is the primary reason that the Central Banks and other powers will move heaven and earth to prevent another financial collapse on the order of The Great Depression.
NO !!! If you want to prevent events like these you have to invest in education. EDUCATION, BETTER AND MORE SCHOOLS, GOOD TV SHOWS etc… Ignorance is the base of each catastophe. Monetary stimuls will just help the rich… expecially in the US where most of the population don’t know the name of his president or where Europe or China are.
Agree. Although the overall financial and economic situation is EXTREMELY bearish there’re still opportunities to make a buck or two. And NOT only by going short one or the other asset class.
Let’s look at the fact. The reality is that there is something in the middle of ‘bull’ and ‘bear’. It is called muddle through, which is exactly what has been happening and will likely continue for a while.
The other reality is that the markets are very much dominated by macro events in these days, especially by a massive game of rumors and counter-rumors helped by a phenomenal dose of central banks intervention. When you have this level of intervention, traditional fundamental matter little, but the cyclical nature of rumors and intervention does. In these types of markets the best way to act is to follow the trends, not try to assess the ‘fundamentals’. So, expect more of this roller coaster. It is actually not a bad time to be a trader. On the other hand, if you are a pension fund or a retail investor, the trite story of ‘stay on course’ for the long term will be utterly disappointing.
I am actually an optimist in that I see crises as a great occasion to kill the old weeds and saw the seeds for the next cycle of prosperity. Just like a forest fire, there may be a prolonged period of personal pain, but the long term will look bright. The only way the world can end is via a major war. That is the only ‘end-of-the-world’ event to worry about.
Finally, remember (again and again) … the economy is not the market …
I really like the notion of making sure we prepare for success as well as guarding against the pitfall in the world. I know several “survivalists” who are spending large sums of money preparing for the downfall of society. When I ask them what happens if it doesn’t come to fruition, they just give a blank stare. Oh well, maybe I can pick up a generator and a really nice rifle cheap when things turn around.