This was originally published ~5 years ago, on April 26, 20005 – 07:20 AM at

In light of some of the pushback to Friday’s commentary, I thought it might be worthwhile trotting it out again. This is an unedited version of the original, typos and all. The only change was to add the links to the related Apprenticed Investor articles.



I had an entirely different column in mind for today. But the events of last week were so peculiar, and so revealing of another classic investor foible, that I shifted gears.

This will be one of the few Apprenticed Investor columns written in response to current events. I’m doing so because I feel it’s necessary to address last week’s topsy-turvy market action. More specifically, the investor reaction to it.

A brief background: In my day job, I advise institutional investors on the state of the markets. When risk, according to my metrics, has risen unacceptably relative to reward, I become cautious. When the reverse happens, I get more aggressive. This has been my style for some time, and it works for me. Once I explain the process, I’ll lay out the mistakes the public makes in reaction to these market calls.

‘Are You a Bull or a Bear?’

I’ve heard this question countless times the past few weeks. And I find it a stunning rejection of Darwinian logic that proponents of such blather have managed to evade extinction. Investors simply never get asked a more distracting and pointless question. Effective investors find their style, then read the market and adapt accordingly.

Of course, in discussions about Wall Street, the bull and bear are mesmerizing. How often do we hear a newscaster somberly intoning: “The bears got gored by the bulls on Wall Street today…” The very next day, we hear the same talking head reverse course: “On Wall Street, the bears came out of their caves to chase the bulls, as the Dow dropped…”

The markets we saw last Wednesday and Thursday are textbook examples of why the colorful imagery of the bulls and bears is magnetically attractive to copywriters and repellent to good investing.

Why is this such a problem? Because of the “folly of forecasting“: Once people commit to a position, there is an unfortunate tendency to root for that perspective. Even worse, people stick with their forecast, regardless of what is actually happening in the market. We addressed this in the very first Apprenticed Investor, Expect to be Wrong. But instead of preparing, people dig their heels in and cost themselves money by being more concerned with trying to be right rather than making money.

Surely, there are cheaper places to look for validation than the stock market.

Bull and Bear, a Matched Pair

In a firm I worked at during the bubble years, many of the brokers had bulls on their desks, but no bears. I used to take away their bulls, and refuse to return them unless they promised to display the bear also. I did this to prove a point: There are two sides to every market.

If you ever meet a money manager/broker/financial adviser who only has bulls displayed, run — don’t walk — to the nearest exit. Why? Because it reveals a fundamental lack of market understanding: Markets go up and down; the bull and the bear each have their day.

And that’s why the bull or bear question is inane. Stockholders should be watching market signals, economic issues and corporate earnings, with an eye toward adjusting their risk profile and investing outlook. Why? Because just like markets, risk goes up and down also. But once an investor commits to the bull/bear question, it leads to the unfortunate tendency to cheerlead for their last call rather than focusing on protecting capital. This very quickly can become an expensive hobby.

Red or Green: A Case Study

Here’s a hypothetical example: Let’s say you have a few errands to run that will require your driving a car. Before you turn the key, decide the following: Are you a “red” or a “green?” You have to be something, so pick one before you leave the garage.

Now, apply that choice at every signal you hit on your errand. If you’re a red, come to a dead stop at every signal. If you are a green, just drive through the next red light. When the cop asks why, just tell him it’s because you are a “green.” (Good luck in court).

Clearly, this is absurd. Rational people observe the color of the light, and step on the brake or accelerator as appropriate. Yet when it comes to the markets, many otherwise rational people do just this. They have predetermined their intentions and invested their dollars — regardless of the many signals the broader market gives. One need look no further than recent history to see that ignoring market signals is a recipe for disaster.

Let’s say you are a bull, and the Fed is tightening, corporate earnings are sputtering, the yield curve is inverting. Do you drive straight through the red light, going aggressively long the Nasdaq-100 Trust (QQQQ)? Or do you notice the signal?

Now imagine you’re a bear and sentiment is at an extreme negative, year-over-year S&P 500 earnings have gone from bad to so-so, and the Fed is cutting rates. Do you stop at the light, shorting the Spyders(SPY), even though it’s bright green?
Savvy investors get long or short (or move to cash), as conditions dictate. When all the signals line up in the market’s favor (regardless of style (valuations, sentiment, monetary policy, etc.), the smart investor gets long. When the indicators line up the opposite way, that investor gets defensive.

The terms bull and bear are anathemas to me. You can be long or short or mostly cash at various times — sometimes all at the same time. So why commit to dogma? The market does not require you to declare your party affiliation or sign up for a religion. “Are you now, or have you ever been, a bear?” is not a question on a new account form. If there’s a perceived advantage to being bearish, you should get bearish and vice versa.

Now, on to the public’s reaction to bearish or bullish calls: One of the typical emails I get, particularly after making a bearish argument is: “In the long run, doesn’t the market tend to go up? Isn’t that reason enough for a bullish bias?”

It depends. If you bought stocks in 1966 when the Dow first hit 1000, well, the long run hardly bailed you out. The Dow didn’t get over 1000 until 1982. How’d you like to spend 16 years and end up with a precisely 0% annual return? And that’s before factoring in inflation.

The problem with the so-called long run is that it overlooks the here and now. “This long run is a misleading guide to current affairs,” wrote John Maynard Keynes in his seminal 1923 work, A Tract on Monetary Reform. “In the long run,” Keynes noted, “we are all dead.”

It has also been an excuse for some terrible advice. Example: “Buy and Hold” works well during some periods (1982-2000) and poorly during others (1966-1982; 2000-2005). If you noticed a pattern here, you are already ahead of the herd.

Adaptability is the key to surviving these longer-term cycles of boom and bust. It is important to have a degree of sensitivity to changing market and economic conditions. Once you recognize a transition is taking place, or hear someone who does, you must be flexible in your response. It’s a lot like Darwinian evolution: Adaptability remains the key to survival. This is just as true for investors as it is for iguanas.

Ignore the market’s reality in favor of the long-term view, and you’ll die with your conviction intact — but likely little else.

Category: Apprenticed Investor, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

13 Responses to “Apprenticed Investor: Bull or Bear? Neither”

  1. Barry, I remember reading some of these Apprenticed Investor columns as they came out back then on TSC, most of it was pretty timeless stuff. Have you ever thought about collecting it into book form of some sort?

    thx for bringing this back, perfect timing



    BR: Yeah, its about half a book — but I am some years away from wading back into a notehr book!

  2. drey says:

    “In a firm I worked at during the bubble years, many of the brokers had bulls on their desks, but no bears. I used to take away their bulls, and refuse to return them unless they promised to display the bear also. I did this to prove a point: There are two sides to every market.”

    Of course there are two sides to every market, unless of course you are a broker, investment banker, or CNBC talking head in which case your livelihood depends on the generation of optimism about the markets and the economy, or cheerleading if you prefer (buy, buy, buy! Don’t miss the party! We’ll all get rich together!)

    Make the distinction between investors/traders and those who feed off them – two completely different things.

  3. mathman says:

    On the other hand:

    “Yet under the constraints of the real world, the one dictated by the laws of physics, not only is growth no longer rational, neither is the use of profit potential as a guideline of where to put investments. In other words, the market as the main mechanism for decisions regarding energy budgets is now counterproductive.”

  4. The timing of the above posting is very appropriate. The countervailing financial assets of: bonds on the one hand and on the other, commodities and equities represent in a debt saturated, hard asset overvalued environment the bull eating the bear’s tail and the bear eating the bull’s tale defining the rotational periodicity of the market.

    For entertainment purposes…..

    12 April 2010 ? The 11 October 2007 Secondary Composite Equity High: Expect a minutely opening Gap Peak Day for the Global Equity Marker: the Wilshire on Monday 12 April 2010

    Likewise on 12 April 2010 look for the transportation index to have an morning opening gap and the lower low gap of 2160 to 2156.09 that occurred between 26 and 29 September 2008 to be filled.

    Fascinating. The final high day of the transport composite index gaps to close its lower low nonlinear gap.

  5. MaxLdaMan says:

    Hey, Barry, hire a temp secretary to pull those AI articles together into a book. I’ve been reading them archived at TheStreet, but the archive is incomplete and disorganized.

  6. insaneclownposse says:

    BR, man I love your work, but I feel like you are kind of oversimplifying things here. I pulled out one of your posts from Oct. 2007 in which you question the data. I’m pretty sure you were also fighting the tape at that point. Here it is…

    Maybe I don’t understand the nuances of the message you are trying to convey with the recent posts over Floyd Norris and the pushback from people who are skeptical of the recovery? But it kind of appears that anyone who doesn’t fully accept the current data is just doing the same thing you were doing back in the fall of 2007. The only difference is that they have not been proven right or wrong at this point. Perhaps I’m way off base though, and please forgive me if I’m misrepresenting your position.

  7. VennData says:

    Find morons, and bet against them.

    — VennData

    P.S. All these “don’t buy TIPs because Clinton ruined the CPI” guys need to realize that Bush I started Michael Boskin on mission to re-calibrate the CPI which a GOP Congress passed. Clinton signed it.

    P.S.S. …these guys claim CPI is ‘rising ten percent” a year. Now, I live in a big city, Chicago, and have a fairly high falutin’ lifestyle, but my CPI ain’t rising ten percent. These guys trust Williams “Shadow Stats” over the entire Fed, Treasury and global credit analysts, etc… etc… OK. I tip my tin foil hat to you. So that means the cost of everything has trebled since Clinton left office. So has it? Not where I live (but then, I don’t make tin foil origami ball caps for my home schoolers like you.)

    Go ahead and believe that nonsense if you want. But here’s something to think about between sips of Earl Grey at your local origami tea ceremony… even if you’re right… even if the market really thought that was true, then TIPs would be that much cheaper. Right?

    I rest my case. (But I’m not holding TIPs… not until the Fed starts hiking THEN allocate to TIPs)

    In fact, if they’re all lying, then you should load up on bonds, here at zero percent rates, since they will never allow the real CPI to rise, you can buy long bonds safely. Right? Right?

    P.P.P.S Don’t do it… I’m telling you… don’t. I mean if they still believe those Clinton lies fifteen years later, why won’t they believe them fifteen years hence? See the problem with your… er… a logic? Tea Partiers?

  8. Rightline says:

    This is what I have on my desk

    they sell on ebay

  9. BR,

    re: these “Apprenticed Investor:”..

    as you can see, the Market, yet, belloweth anew, above..

    Are these available on your BP site?

    As well, from here, you should run these more often–they’re Gold..

    As is obvious, We all, myself, surely, inccluded, have much to learn; these “Apprenticed Investor:”–pieces are some of the best distillates, of, and on, The Game, that one could put ‘in their Tank’.

  10. tipsorno says:

    VennData, why buy into TIPS only after the Fed starts increasing rates? Why not hold a TIPS fund now and watch it increase in value?

  11. I-Man says:

    Good stuff, BR-

    You should pull these out on the regular. Its a different side of your work, and a great addition to the content, in my humble opinion of course.

  12. rileyx67 says:

    Great reminder Barry! Have NO “fundamental” opinions on the direction Market will take, but be observant, open-minded and adaptable and you’ll do well in either direction. How much money is lost by continuing to hold a loser that you THOUGHT would be a winner…or even worse, doubling down. Our ego comes in here, and we have got to keep it under control.

  13. peter north says:

    Barry, I’d also love to see and purchase the full collection of those Apprenticed Investor articles. Great stuff.