“If you’re bullish and wrong, you usually have plenty of company. But if you’re bearish and wrong, it’s almost unforgivable.”

-Bob Kargenian, TABR Capital Management, Barron’s DECEMBER 15, 2012



The above quote from Barron’s has been on my mind for a while. I thought of it again as the markets have made a series of new highs, and the bear community has been split. Some have been “forced in,” while others have doubled down.

The context of the above was a letter to Barron’s in response to a December 1st 2012 Abelson commentary that stated “why money manager John Hussman is very bearish on stocks”  (“A Real Cliff Hanger,” Up & Down Wall Street, Dec. 3)

There is an intricate set of issues here, but I want to focus on three aspects: 1) Psychology, 2) Error admission & correction, and 3) why “Other People’s Money” (OPM) agency issue is not present or understood by the commentariat — those ministers without portfolio who are the background noise to the market.

Since this rally began in March 2009, it has been disliked. I was a kid in 1973-74, so I have no firsthand recollection of how the crowd responded to the 76% bounce-back rally. 1933 was way before my time. Perhaps there was a touch of hyperbole when, back in 2009, I wrote this was the Most Hated Rally in Wall Street History®. I wasn’t present for these other similar crash bouncebacks, but I suspect the psychology was the same. Dispirited traders suffering from recency effects were overly impacted by memories of the crash. The rally left these frightened folks behind.

That emotional cognitive bias has prevented many from recognizing the turn or even committing in a small way to having upside exposure. There are a great many reasons why the rally should not continue, and why it will end badly. There certainly are plenty of things to be concerned about. However, what makes investing in markets so different from other forms of intellectual debate is that we regularly get a resolution to the different arguments via market returns. We may have different timelines, and the daily action is essentially noise, but we do get a resolution. Each month, each quarter, each year, we see which argument was more pragmatically correct in terms of the outcome of various risk assets. Their progress, or lack thereof, is the ultimate adjudicator.

This is not to say that markets are never wrong — they are often wrong, and  can stay that way for extended periods of time. However, beyond the psychology we discussed above (and ad nauseum elsewhere), there comes a point were you must admit error, reverse your position, and move on.

This is where the quote above comes in. If you are running OPM, you cannot miss a 145% move to the upside. The classic  quote on this is “If you are bullish and wrong, your clients are angry at you. If you are bearish and wrong, they fire you.” (I wish I knew the original source for this!)

Hence, our agency issue. This is what is meant by “Forced in” — managers running real assets cannot sit idly by on the sidelines. Eventually, they either buy in or lose so much in AUM that they have effectively been fired. This is why having some form of self-analysis to a) examine when you are wrong; b) be able to determine why; and then c) reverse your position . . . is so crucial to anyone who is an investor (professional or amateur).

The exceptions are the Ministers without Portfolio. These are the talking heads, the pundits and strategists who can carve out an intellectual position that proves to be wildly wrong. And they can do so without incurring a penalty, an angry client phone call or a firing.

Think about who is on TV and/or spilling pixels on the OpEd pages lately. The People who have been wrong on everything from Equities to Bonds to the Dollar to Gold to Apple (AAPL) and back again. How is it this parade of wrong way Riegels manages to keep showing up again and again to blather about whatever it is they are wrong about this time? Why is there zero accountability?

The answer is surprisingly simple: Its not a bug, its a feature. They are in the infotainment business, not the asset management business. Hence, being wrong, albeit entertainingly, is part of their jobs.

I started as a trader, moved to research, eventually coming back around as a money manager. I can tell you first hand that being eventually right — Dow 6800, anyone? — only works if your are on the sidelines yelling at the players. Your obligations completely change once you step onto the field of battle. When you are responsible for people’s portfolios, your role must change.

Note too, that this is not a Chuck-Prince-dance-when-the-music-is-playing scenario. As a CEO, his misaligned compensation encouraged him to dance right to the edge of the cliff. Some of us clearly put forward compelling analyses as to why that Housing/Derivatives/Subprime cycle was doomed.

Which brings me back to the present market. What we are dealing with today is a case of first impression — massive credit crisis and collapse, followed by massive Fed intervention. We don’t know how this plays out, as we have never seen anything quite like this in history. Can the Fed simply wait it out, and let $4 trillion in bonds to mature without rolling over? I have no idea, but neither do the folks insisting it ends with us living in a post-apocalyptic Mad Max era.

Just like every other cycle, one day, this bull market will end. I cannot tell you if its next Tuesday or sometime in 2019. The average (See first table below) is 3.8 years. We are now at 4.1 years. But the range is much broader, as both tables below makes clear.

There are many silly reasons for being either all in — or all out — of the markets. The bottom line is that you should have a firm grasp on your own investment posture, risk tolerances and financial goals. You should understand how we got here and why. Make sure you have some form of your own coherent plan. But if you are waiting for someone else on TV to tell you what to do, whether its Jim Cramer or David Tepper or even lil’ ole Me, then you have yourself a big problem.

There is asset management, and there is infotainment, and never the twain shall meet.



click for larger graphic



Looking at the Very Very Long Term (November 6th, 2003)

Four Stages of Secular Bear Markets (August 27th, 2009)

The Most Hated Rally in Wall Street History (October 8th, 2009

Bull Market Durations  (January 15th, 2013)

Is the Secular Bear Market Coming to an End? (February 4th, 2013)


Table: Secular Bear Markets and Subsequent Rebound Rally:




Category: Investing, Psychology, Sentiment, Valuation

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.

26 Responses to “Habits of the Bear, Bull Markets and Agency Issues”

  1. biotrekker says:

    Great (and useful) article.

  2. tshelton12 says:

    Great piece BR. This is one of the most true things I have read. While I may personally be really bearish, it does not matter. The markets are telling us something and because I run OPM I don’t have the luxury of being wrong. This is why you MUST have a sound risk management system in place to identify when the markets are changing and adapt then. Then, when the markets tell you, adapt and change. Until then, take the profits and stay aware of the environment you are in.

  3. Gonzop says:

    “If you’re bullish and wrong, you usually have plenty of company. But if you’re bearish and wrong, it’s almost unforgivable.”

    so true

    this asymmetry that bears may find unfair is actually compensated by another asymmetrical fact: astute bears can make money 4 to 5 times faster on the way down than it took bulls to lock on the way up

  4. Orange14 says:

    A very perceptive column. I would offer up another old aphorism, ‘to thine own self be true,’ for consideration as well. One can spend hours of day watching and reading what I call “investotainment” and at the end of the day be as confused as you were at the beginning. One has to tune things out and spend the time figuring out what is good for ‘you’ and not for ‘others.’ In some cases this means finding a money manager that you trust and staying with them through the peaks and valleys (though one hopes for more peaks than valleys). In others it means having the convictions of your own strategy and looking for the information that is necessary to execute it.

    Whether this is a ‘false’ bull market or not, having money on the sideline or trying to rationalize away why equities are a poor investment is damaging. I’ve felt that a number of sectors were and in some cases undervalued and it has worked out thus far. Of course the decision as to when to take money out of equities is always going to be challenging in the current environment of low bond yields (as well as the possibility of losing principal when interests rise). It’s tough out there right now and always has been.

    Thanks for the provocative thoughts!!!

  5. NMR says:

    Great bit of philosophizing Barry. First rule of life is pay no attention to those in the info-tainment business. Anyone who followed the run up to 2008 and has forgotten how these clowns behaved needs a trip to memory re-hab. To be fair I wouldn’t have included Tepper in your list who is a professional and talked a lot of sense in my book (as you do on the whole which is why I check you out occasionally). I’m not a professional or a day trader, just a dabbler for about 45 years, but really 2007-9 was a great opportunity to make a few bucks. If you couldn’t see the writing on the wall by mid 2007 you needed an eye test and similarly when the Dow was around 6500 and you had blue chip cyclicals at half book it was a time to sign some checks. Since then the bollocks I’ve seen in the media from political and economic hacks and guys talking their books would fill the Atlantic. Thank god I don’t have to make anyone angry or happy other than myself (although you’re well paid for it!)

  6. Emmanuel says:

    Great piece as usual. I have been following without being registered for a very long time. I just registered to be able to congratulate on a very useful blog. Another dimension in this subject seems to be where in your investment cycle you are: myself, not saving anymore or my just graduated son (Max) starting his engineering career potentially saving most of his monthly paycheck. Can Max afford to time the market? or would that be Mad. Also minor typo: http://en.wikipedia.org/wiki/Ad_nauseam

  7. [...] Barry Ritholtz, “There is asset management, and there is infotainment, and never the twain shall meet.”  (Big Picture) [...]

  8. [...] Source: The Big Picture [...]

  9. dctodd27 says:

    “Hence, our agency issue. This is what is meant by “Forced in” — managers running real assets cannot sit on the sidelines. Eventually, they either buy in or lose so much in AUM that they have effectively been fired.”

    GMO proved years ago this statement is simply not true. They lost billions in assets for underperformance in the late 1990s, and while they probably dealt with similar calls to admit failure in the short-term, in the long term they were eventually proven correct and their assets rebounded. Last I heard they were doing just fine. And don’t tell me they are the exception to the rule because they run portfolios the way you are supposed to. Buy low, be patient, don’t get sucked into the hype. And, as it turns out, they are 50% on the sidelines right now so caveat emptor…

    • Is GMO typical, or is Grantham the exception that proves the rule?

      I love the way Grantham’s mind works, he is a legend in my book — but he can get away with doing things that you or I could not. They have been heavily cash for most of this rally — most advisors running OPM (without his 30 year track record) would have been fired.

      • ZevCapital says:

        Grantham’s now famous 2009 letter and your blog are two of the reasons why I was able to overcome my tremendous fear and buy in March of 2009. I still remember my pounding chest and shaking hand as I bought Apple, Amazon, and Freeport-McMoran. Unfortunately for me, the Ministers without Portfolio got into my head and I sold out of Apple and Amazon 6 months later. (I held FCX for 2 years) I hope more people can understand the dangers of letting the infotainers scare them out of good positions.

        It was Grantham who taught me about career risk”during that frightening period. Just wondering when career risk became a major part of your analysis?

      • I don’t have a career. I do what I do, and I consider myself quite fortunate to get paid for it.

        I’ve been doing this for quite a while — 25,000+ blog posts — so career risk is not a big concern with me. But on the other hand, asset management clients with a 20-40 year window (to retirement or inter-generation wealth transfer) do not want me sitting in cash . . .

      • ZevCapital says:

        Well whatever you call it, I have been reading the bulk of those posts since I was a 4th year PhD chemistry student and thinking about a plan-B just in case the academic career didn’t pan out.
        Your appreciation of science drew me in, but it was your tendency to point out fallacies and biases that made me realize that my scientific training would give me an instant edge over the herd. (The peer-review process is brutal, but it does a great job of keeping confirmation biases in check)
        Just wanted to say thanks. You’ve been like a mentor and I’m sure there are others out there who are just like me. We just don’t post as much as the trolls.

  10. gloeschi says:

    Re: “Dance until the music stops” How are incentives in the asset management business not misaligned with clients’ interest? Most asset managers charge a fee in % of assets, so asset gathering is the key to profit. Performance for clients? Why, that doesn’t pay. It also doesn’t pay to be bearish, since how would you observe fiduciary duty then (you would have to sell – and charge clients a fee for holding cash at zero interest)? Asset managers are 95-100% invested by default, simply praying that market will not crash. If it does, well, then “nobody saw it coming”. They are in good company with Bernanke & Co.

    • Compare the two players:

      1. Option heavy insiders manage to capture all of the Upside, but in 2007-08 years, were not penalized for the downside. The CEOs of Lehman, AIG, Bear, Merrill etc. all slipped away with 100s of millions of dollars. E.G.: Lehman’s Dick Fuld is reputed to be worth $500 million after LEH went to Zero.

      2. Asset managers who were LONG & WRONG lost 57% of their asset base — that’s how much S&P500 lost peak to trough. Its a huge hit to their revenues, for as AUM goes so goes their comp. That’s BEFORE clients fired them.

      On the other hand, Managers who guided their clients through the crash with less damage not only were not fired, they attracted assets. Their comp rose despite (or perhaps because of) the crash

      Between those two compensation arrangements, which one is more misaligned?

      • Ralph says:

        2 & 20% is one thing — thats a racket. Straight 1% is a different game altogether

  11. OscarWildeDog says:

    I don’t mind the pundits, talking heads or other content providers being wrong; I DO take offense that the media platforms or outlets that allow CO2 out of their pie holes don’t hold them accountable in any way whatsoever. I get a chuckle when I hear that old broad from GS – Abby Joseph Cohen whatever – introduced as the one who called the Nasdaq bubble in 1999. Really? That’s her claim to fame? And then Roubini is still (trying) to make hay from his call in 2008. And the Ellott Wave guy is still calling for financial armageddon. I guess I could have a career as a talking head if I make one right call at the right time on the right outlet.

    This is the only reason I listen to or read the money managers’ output, like Barry, Dalio or Tepper.

  12. Joe says:

    Years ago the portfolio manager for my Union’s pension funds (both defined benefit and defined contribution funds) was screaming at me on the phone. I’d built a persuasive case that he should be fired and the Union trustee’s had run him off earlier in the day. He was incredulous that I had any issues at all with a solid blue chip All American portfolio that he ran for us. He wanted to know if I had a clue about all the wonderful things about all great stocks that were in the funds. I interrupted him and said, “There is only one characteristic about any stock that interests me in the slightest. If you don’t understand that, we can’t talk.” He was silent for a moment and then ventured, ” Long term cumulative returns?” I said yes to get the conversation started, but in fact, all I really care about is returns. Short term returns at that.

    A series of short term returns, which you are not supposed to pay much attention to, is what makes up long term cumulative returns. Which is what is supposed to be important and what you are supposed to pay attention to.

    I’d bought into the inevitable upcoming financial crisis about a year or two before it happened (I’ve read Barry since 04 at TSC) but regardless of what I believed, price trumped theory and I stayed fully invested because i made money short term. Until one day price started lining up with theory and i stopped making money. When we rolled over the top and down,down,down, I moved to 100% GIC in my 401 and I took many friends with me.

    When we hit bottom and the market turned up, everyone knew that there were years of bad stuff
    yet to surface, that employment would take years and years to recover, that bailouts would be huge, and that real estate was toast for years to come. I had no desire to buy stocks. But stock prices started up regardless of what I thought. A month or two of leaving money on the table caused me to come to terms with myself about slowly edging back into the market on an experimental basis, staging buys, and ready to protect profits ruthlessly should I be wrong. It worked out pretty well ever since. For me, anyway. Most of my friends are still in the GIC at 1%. I’ve done some bad shit and forgiving myself was easy. The good deed of getting my friends out of the default 60%/40% stocks/bonds prior to the crash, never to return to stocks is something I still beat myself up over…

    Am I really smart? Or do I have a client who is mostly interested more in making money when he can, avoiding losing any more money than the minimum necessary from operating in an imperfect world, and finds no worth in being right if the whole rest of the world doesn’t care and it costs money. And is pretty rigorous about squaring me back up if I get out of plumb.

    Nothing focuses the mind quite like a direct link between profits and food and shelter. Nothing spends quite so poorly as money left on the table…

  13. [...] comments in yesterday morning’s post sent me back to GMO’s archive to pull some of Ben Inker’s [...]

  14. [...] found an interesting quote at The Big Picture [...]

  15. MetFund says:

    excellent perspective per usual.

  16. [...] via Habits of the Bear, Bull Markets and Agency Issues | The Big Picture. [...]