It's Hard To Be A Bear When Everyone Is Bullish. Part 1

bear market thinking investwithalex

Let me ask you something. If you knew that a 2007-2009 sell-off was about to happen and the extent of it, would you have sold everything and went 100% short? Of course you would have, most likely with put options to maximize the effect. At the very least you would have gone 100% into cash.

Being a bear while everyone else is bullish is one of the most challenging propositions in investing. For instance, ‘Short selling is an incredibly lonely proposition,’ billionaire hedge fund manager Bill Ackman says

Yet, it can pay off big time if you get your TIMING right. However, since most people, even professional investors are terrified of shorting, I will introduce a quick series about short selling, proper risk management when short selling and the best way to maximize returns. This was to be a part of my never finished book (no time to finish it)…….

“BUY LOW, SELL HIGH, GO SHORT & COVER”

Are You Sure?

Starting in the late 1960’s the mutual fund industry picked a simple truth to sell to investors. To buy stocks for the long-term and to keep adding money to their coffers month after month and year after year. And according to most people in the investment industry, this simple strategy should outperform the market over the long term, yielding you just enough moolah to fully enjoy that awesome retirement in Boca Raton. And if you play your cards right, you might even have enough investment gains to be able to afford early bird dinner specials until you are 100. Today, so very few people question this investment approach that the “truth” above might as well be recorded in the New Testament as the Gospel of Goldman Sachs.

As accurate as this investment premise might be, it is a well known fact that most investors fail to beat the market on the consistent basis. Mutual fund or not. Plus, the stock market history does not support the claim. Did you know that between 1899 and 1949, a 50 year period of time, the Dow went up just 185%. Yielding an annual rate of return of just 2%. That translates to NO capital gains when adjusted for inflation. That’s right, a big fat ZERO.

The same thing happened between 1790 and 1860. A 70 year period of time. Between 1966 and 1982 the market declined 25%. Hell, we don’t have to go further than today to see how inadequate the strategy above is. With the market facing another bear leg, the Dow is up just 45% since its secular bull market top in January of 2000. The Nasdaq is just now breaking even.

Don’t get me wrong, for most passive investors; the strategy above is a fairly good one. Yet, those who invest in such a fashion over the long-term shouldn’t expect to earn much more than a rate of inflation or the yield on a 10-Year Treasury. In other words, the mutual fund industry will never make you any money. They will make a ton of money for themselves through various fees, but they will never make you rich. If you want higher returns you have to take risks by dismissing the gospel above and by venturing outside.

To be continued on Monday…..