Bulls vs. Bears: Who’s Right?

Experience taught me a few things. One is to listen to your gut, no matter how good something sounds on paper. The second is that you’re generally better off sticking with what you know. And the third is that sometimes your best investments are the ones you don’t make.

~ Donald Trump

Investing can be very confusing. At any given moment in time, you can find very smart people who will tell you that now is a great time to invest in stocks. These are the bulls. At the very same moment, you can find very smart people who will tell you that now is a terrible time to pile into stocks. These are the bears.

Today I’m going to present you with the opinions of two analysts with very different approaches to investing. I’m going to call one a bear and one a bull, although both would change their views if the indicators they follow were to change. Neither should be considered a blanket spokesperson for their respective cases. There are many people who are bullish or bearish for reasons that are different than those outlined here.

In This Corner, the Bulls

The bull corner for today will be populated by Leon Tuey, a veteran technical analyst whose Letter to the Bears was published by Jonathan Ratner of the Financial Post. I came across it courtesy of @JonChevreau on Twitter. This is a kind of Nelson Muntz (click for sound bite) swipe at anyone who’s been bearish on the market since the rally started a year ago. Having said that, Mr. Tuey does make some valid points:

  • Secular Bear Thesis is Not Holding Up: Mr. Tuey is under the impression that secular bear markets should trace lower lows. If that were the case, he would be right. However, most of the folks that I’ve read who have characterized this as a secular bear market (Danielle Park, John Mauldin, and many others) would not describe it that way. Instead, a secular bear market is a long cycle where the markets experience great volatility in both directions and end up virtually unchanged at the end of it all. This particular point of contention seems to be more an issue of definition rather than disagreement.
  • V-Shaped Recovery Is No Surprise: Given the monetary and fiscal stimulus shoveled into the global financial system by governments and central banks worldwide, it’s no surprise that the economy is doing much better. The bears will lament the consequences of this stimulus down the road, but right now, the markets are rising as a result of these efforts.
  • The Stock Market Is a Leading Indicator: Bears who have been worried about the consumer because of high unemployment, low savings, and the collapse of the housing market are ignoring the phenomenal performance of the retailers and the IYR real estate ETF. These indices are telling us that things are going to get better.
  • Corrections Are a Normal Part of All Bull Markets: Mr. Tuey seems to be arguing that the stock market, in the long term, is a bull market. The recent correction was no more than a normal readjustment in a market that had rallied long and strong for many years.
  • Don’t Fight the Tape: The trend is up. If you choose to trade against the trend, you do so at your peril. “To err is human, but to argue with the market is an exercise in masochism”.

In This Corner, the Bears

My bear du jour is Danielle Park, author of Juggling Dynamite, popular guest speaker, and money manager. She was bearish before the financial crisis hit, turned bullish around February of 2009, and now feels that the markets may have come too far too fast. Ms. Park recently did an interview with Stirling Faux of The Money and Wealth Show. Some of her thoughts are as follows:

  • Wall St. vs. Main St.: The markets have risen dramatically over the past year, but on low volume. Many average investors felt duped by the markets after the financial crisis and have been reluctant to participate as a result. Ms. Park fears they will re-enter just as the music stops and get clobbered all over again.
  • The Recent Pain Wasn’t Long or Deep Enough: The good old boys on Wall Street that caused this crisis are back to their old tricks again, having reloaded their pockets with a fresh supply of capital from Main Street taxpayers. These guys were probably scared for about a week during the crisis, but continued happily on their way once it became apparent that the government would bail them out. (I made the case in Capitalism: The Missing Links that this is definitively not the way that capitalism is supposed to work.)
  • Price Risk Is Now Extremely High: Valuations are stretched and this is not a great time to buy. Rather, investors should be using rallies as a chance to sell risk.
  • Interest Rates Are Likely at an Inflection Point: Rates have been so low for so long that they are likely to rise at some point soon. Consumers and bond investors should plan accordingly. (Note: I have a guest post at Canadian Finance Blog today on Low Interest Rates: The Good, the Bad, and the Ugly.)
  • Increasing Savings Is the Best Investment Strategy Right Now: If interest rates are set to rise, long-suffering savers will finally reap the rewards of their fiscal prudence.

My 2 Cents

If you’ve been reading Balance Junkie for a while, you can probably guess that I tend to agree more with Ms. Park. There are actually 4 parts to the interview on YouTube and I would encourage you to watch the whole thing. Mr. Tuey made some good points as well, and those who bought stocks anytime over the past year or so have been handsomely rewarded.

It comes down to your time horizon and risk tolerance. The key is to have a plan and stick to it. If your plan includes a high equity weighting, you need to make sure that you are willing to hold stocks through bull and bear cycles without getting scared into selling at the bottom or doubling down at the top.

If your risk tolerance is low, then you may want to lower your equity weighting as I think we’re in for more choppy waters ahead. If your plan includes a minimal or zero weighting in equities, then you need to be OK with the fact that the market may in fact rally further from here without you.

I think Danielle Park offered the best advice I’ve heard  from a money manager in a while:

  • Take advantage of these low interest rates to pay off your debt.
  • Build up your savings.
  • Opportunities to buy at lower prices are coming, but they’re not here at the moment.

That’s my plan and I’m sticking to it.

Where do you stand on this bull-bear debate?

Written by Kim Petch

10 Responses to Bulls vs. Bears: Who’s Right?

  1. 2 Cents,

    I like this piece. And you write very well. Keep up the great blogging–I really enjoy your site.

    Cheers,

    Andrew

    • 2 Cents says:

      It’s really nice to get some feedback – especially if it’s positive! ;) Thanks for taking the time to comment Andrew. It’s much appreciated.

  2. Great post! My two cents is it is futile to predict whether the bull or the bear will prevail. Experts go to great lengths to try to REASON why markets will go up or down but remember at the end of the day the stock market is where buyers and sellers converge. When there are more buyers than sellers, markets go up. when there are more sellers than buyers, the markets go down. Why people buy and sell is based more on emotion than logic. that’s why markets are designed to be unpredictable. I suggest that people focus on what they can control which can be summed up in the last few lines of your post. Control your debt, control your savings, control your financial cushion. Keep up the good work 2 cents!

    • 2 Cents says:

      I’ll second your thoughts Jim. The market will do what it will do. We can’t control or predict it, so we might as well control what we can: our budget, debt, and savings. Many thanks for your encouragement! :)

  3. The bulls have had a great run… but as the bears come out of hibernation, it’s time for the bulls to take a nap. Until employment figures change, the bears will be found on “the street.”

    • 2 Cents says:

      I think so too. Earnings reports have been fantastic, but I don’t like the looks of Greek bond yields. I’ve been concerned about sovereign debt for some time, though, and so far it hasn’t caused much more than a ripple.

      Those Michael Lewis videos are really eye-opening! I hope everyone has taken some time to watch them.

  4. 2 Cents:

    I’m with wealthweb guru as well. Nobody has proven with any reliability that they can time the market (which, short term–less than, say, 10 years) is a manifestation of human group emotion, and not really a fundamental determinant.

    It’s a slippery slope when we think we can “time” or predict market directions–and it’s even worse when we guess correctly. Doing so might tempt us to wander back into the casino, mistaking luck for skill. That could be a pretty expensive proposition.

    I think it’s fun to try guessing market directions, but acting on what we (or anyone else) surmises is a bit crazy. That said, people aren’t logical. If we were, it wouldn’t be any fun, would it?

    Andrew

    • 2 Cents says:

      I guess the distinction you’re making is between investing and trading. While I would certainly agree that investing with a very long time horizon should be the methodology of choice for most people, there are those who do very well with trading. Most of these people follow a strict discipline that controls risk.

  5. I wasn’t thinking about the distinction between investing and trading. I was thinking of those who try timing the market: suggesting that they should or should not have money in the market based on speculative gut or economic news. Nobody has a long recorded track record of doing that successfully, so it’s a bit of fool’s errand to try, according to the research.
    As for those who can successfully “trade” with disciplined strategies, when it comes to long term performance, they might be more folklore than we’d like to think. While it sounds romantic that there are many people who can trade effectively with market beating results over many years, evidence seems to suggest otherwise. One can assume that the ultimate “traders” are the CFAs running Hedge Funds and actively managed mutual funds.
    But as a group, they fail to beat the market. After survivorship and backfill bias, the vast majority of hedge funds lose disastrously to the market, as suggested by the fine research in David Swenson’s book, Pioneering Portfolio Management.
    You won’t see the survivorship or backfill bias reported in the results of Hedge Funds in the back of the Economist (where, as an aggregate, if they are reported beating the market as a group, it’s only fractionally–and pre-tax at that)
    In a study of 3,500 Hedge Funds over more than 10 years, Roger Ibbotson of the Yale School of Management found that survivorship bias added 2.9% annually to the self reported returns of Hedge Funds, while backfill bias added a further 4.6% annually. (See Swenson, pg 195)
    Burton Malkiel conducted an 8 year study through Princeton University, finding that survivorship bias and backfill bias added 7.5% annually to the self reported returns in the back of the Economist.
    Survivorship bias is only taking the results of the Hedge Funds that perform well and survive. Backfill bias is taking the results of tiny funds that start out, then give the database a self reported performance record to state what returns they made when they were tiny, or not (in some cases) even available to the public.
    What’s worse, is that more than 75% of Hedge Funds disappeared from 1996 to 2004 due to poor performance. These go into the “not reported” file, inflating survivorship returns.

    The deficit that Hedge Funds as an aggregate add (in terms of fees) isn’t the entire explanation for their poor performance relative to the market. As an aggregate, even without the fees, they would have lost to the market if reported properly.

    So—it’s really tough to say that a trader sitting in his basement is going to trade better than a CFA trained and experienced Hedge Fund manager who trades professionally. As romantic as it sounds, I’d hate to think of the slim odds of success in trading over, say, a 10 year period.
    Looking at those who survived and succeeded, can be a bit like looking at lottery winners and suggesting, “see, it does work”. With mutual funds, as with Hedge Funds, as with individual brokerage traders, studies show that the less “activity” or “trading” that occurs, the more money that’s made.

    • 2 Cents says:

      Agreed. Even one of the most famous traders of all time, Jesse Livermore said: “It never was my thinking that made the big money for me. It always was my sitting.” Of course, things didn’t end well for Livermore either. ;)

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