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The Pragmatic Capitalist had a recent post calling attention to a James Altucher question, “Why Do Bears Seem Smarter Than Bulls?”
In response to Altucher, TPC was more generous than I will be. This post recaps my spontaneous take in the TPC comment thread.
To be blunt, Altucher’s take on “why bears seem smarter” was woefully shoddy and haphazard in my view — a borderline hatchet job.
Consider his four “reasons” why bears seem smarter: Laziness; Evolution; Fitting In; Pattern Recognition.
Here is Altucher in his own words:
1) Laziness. People want justification to not work harder (“if the world is going to hell then why should I bother”).
2) Evolution. People’s brains are hardwired to respond more to signs of danger. Our brains can get fixated, and then addicted, to the negative more than the positive.
3) Fitting in. Because we all have a need to be accepted, liked, and listened to, people are likely to share bad news than good news (because they know that #2 above will get them to be listened to if its bad news).
4) Pattern recognition. Because of #2, people will notice bad events more than positive events as they happen and more easily link those events to the people who “warned them”.
- “Laziness” is a hallmark of the bulls, not the bears. Consider that short sellers are known to do some of the best research on the Street — because they have to in order to survive.
- “Evolution” favors a bullish mentality, not a bearish one, in the sense that the overwhelming majority of market participants have a strong and documented optimism bias — NOT a pessimism bias. Those who do not have this bias tend to self-select out of active investment participation in the first place.
- As for “Fitting In”… it’s easier to fit in as a bear than a bull??? You have to be bloody kidding me. This is nonsensical on its face. The entire Wall Street mechanism, not to mention the vast majority of the long-term investment community, is oriented towards long-only.
- Last but not least, Pattern Recognition — this isn’t even a real argument on Altucher’s part. He just threw it in as a sort of hand wave.
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As for some genuine reasons bears seem “smarter” than bulls, I would submit the following: Contrarianism; Creative Analysis; Reaction to Poor Analysis; Risk Awareness.
- Contrarianism: To be blunt, the “masses,” i.e. “crowds,” are perceived as dumb. To be in lockstep with every Tom, Dick and Harry smacks of flying on autopilot to the land of groupthink. Thus, to be against the masses is perceived as smart. Bearishness is perceived as “smarter” precisely because it is, generally speaking, the less popular, anti-crowd view. Altucher gets this ass backwards.
- Creative Analysis: On balance, the bears tend to have more creative and rigorous arguments. They put more elbow grease into their arguments, and work harder at developing logical chains of thought.
- Reaction to Poor Analysis: A great many bullish arguments are mind-numbingly bad. With the great outpouring of idiocy on CNBC and elsehwere, it is hard not to want to lean the other way. Once again, this is a function of the overwhelming popularity of bullishness and conventional wisdom, and a sense of contrarian allergy to such.
- Risk Awareness: Bears tend to combine creativity and high analytical ability with a heightened sense of risk control in respect to worrying about all the things that could go wrong. While the bulls look at the 90% of factors that say “blue skies,” the bears will focus on that 10% that poses severe and serious risk.
Of course, it is entirely true that the bears spend great periods of time in the wilderness. It is very expensive to be a perma-bear, a perma-bull, or a perma-anything for that matter. As Jesse Livermore observed via Reminiscences, there is only one side to be on in the stock market — not the bull side or the bear side, but the right side.
In defense of the bears, though, while the bulls spend a far greater amount of calender time being right, when they are caught out the results tend to be spectacular. (Or rather, spectacularly ugly.) Think of the ten year returns of the S&P, or the fact that treasury bonds have beaten out equities for the duration of the late great bull market precisely because of the horrible crashes that (repeatedly) slaughtered the unthinking bulls en masse.
The central failing of the bears (in my humble opinion) is a failure to understand the dynamics of human psychology, and a further failure to understand that the market is (as a general rule) dominated by optimistic crowds.
If it is Mr. Market’s nature to be unabashedly optimistic most of the time, well, then that is his nature — there is not much point (or profit) in fighting it, except carefully and selectively as situational opportunities warrant.
At the same time, though, to proudly label one’s self a “bull” is another egregious exercise in dumbness. Reminiscences had it right; better to not be a perma-anything, and to further recognize that there are no “rights” or “wrongs” in markets, only subjective opinions, with the crowd only being “wrong” (in directional terms) at major turning points.
Neither Bull Nor Bear, But Mercenary,
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