Outlined against a blue-gray October sky . . . If you're already misty-eyed, I know you're a dyed-in-the-wool Fighting Irish fan. You know the game in question (ND-Army, October 18, 1924), who won (duh, the Irish, 13-7), and you even know the origin of the allusion (Revelations 6:1-8). I know . . . but as important, you know I know.
That poetic phrase is a shibboleth—a catchword or gesture instantly identifying you to other like-minded people and framing shared characteristics for the group. Everyone's got them, including investors. These group quirks give us a sense of belonging—as humans, we've evolved to be tribal. In this space, we frequently examine how our ancestors' behavior shapes our behavior today in an effort to understand the squirrelly investing decisions we make.
Living and hunting in tribes, speaking a mutually understood language made our ancestors feel safe and secure. But pack instincts can be devastatingly costly when you invest. Raise your hand if you've heard the following words, "This is just a cyclical bull in a secular bear." Put down your hand and find a credible therapist if you believe the words to be true.
The "secular bear" mantra is the perma-bears' shibboleth. Perma-bears abound, some have famous names and work for famous firms. We won't name names, but you know who they are and who they aren't—specifically, they're not spectacular market forecasters. Don't believe us? There are plenty of credible, third-parties ranking forecasters with whom you can check.
Many perma-bears ride a too-long wave of credibility—stopped clocks who finally got it right in 2001 and 2002. Greenspan uttered, "Irrational exuberance," and they thought, "Darn right!" Too bad Greenspan's own famous catchphrase was a mere 3 years and about 100 percentage points of lip-smacking stock returns too early.
Perma-bears are endlessly popular because they fill our tribal need to belong to a pack and find folks who support our way of thinking. The blogosphere is filled with perma-bears, sometimes with a perma-bear leader, all confirming their bias to bearishness. Yes, the end is nigh! Yes, the market is over-valued! Yes, it's a housing bubble! And we're all geniuses for agreeing with each other! Yay us!
What perma-bears mean by "cyclical bull in a secular bear" is up-market trends are mere blips in overall, stronger, down cycles. Pause to think that through. How could the market possibly average about 10% per year, give or take, if it were only going down forever? Yet, plenty of otherwise rational people believe with their souls the market is doomed to go to zero. And then, perhaps, defying physics, turn negative.
Here's just one example of an article toeing the perma-bear party line:
Ignoring the Lessons of 1929
By Bill Fleckenstein, MSN-Money
Parallels to the Crash of 1929? Check. Insinuations of shady machinations by Wall Street types? Check. Dredging of pop-culture concerns du jour? Check. Carefully skirting powerful, positive fundamentals? Check check check.
It's natural to cleave to a guru, but before falling lemming-like in line, check your tribal instinct. Does this person have a credible, verifiable track record meriting an army of fawning acolytes? Sometimes the most passionately followed quote-unquote guru has the most miserable track record. What was this person saying in 2003? In 2001? In 1997? Were they right? It's easy to check today—no one can hide from the magic of the Internet.
On the flip side, perma-bears point fingers at bullish brethren, derisively sneering "perma-bull." Fair enough, except history's in the perma(ish)-bulls corner—stocks are overwhelmingly the best performing asset class over long periods, significantly outpacing bonds in 98% of 20-year rolling periods historically. (And you can forget about cash.) Making the credible case that bearishness is the appropriate course of action much of the time requires either suicidal pessimism or the most awesome case of data mining we've ever witnessed. If you've got a long time horizon (and you probably do), unless you know something pretty significant most others can't fathom, stocks are usually your best bet. (Pun intended.) But before you make the mistake of falling in with the wrong perma-bull crowd, remember, sometimes bearishness is appropriate. If you want to beat the market over time, the best course of action is dynamic asset allocation.
If you must pick a group with whom you can identify, try your local church, school, or area professional sports team. Joining the Raider nation, donning a bright yellow "We Believe" T-shirt, or dabbling in face-painting is far less humiliating, long term, than associating with the rag-tag sleuth of perma-bears.