I have a long history of watching bears destroy their wealth (and that of others) by living in fear of the next market meltdown. I used to work closely with an associate who felt it was his job to warn you about the next correction in stocks. In fact, this person was so wholeheartedly committed to pushing his agenda that he was able to convince many investors that he knew what the future held for stocks, bonds and commodities.
He must have had some sort of crystal ball under his desk that no one else knew about.
The most egregious error was not convincing people that a correction was going to materialize. Everyone knows that the stock market ebbs and flows just like the tides. We are going to experience periods of economic expansion and contraction, that is a part of every business cycle.
So, knowing that bears in general can be harmful to your financial health, here are a few things about them you should understand:
#1: Never Wrong, Just Early
The first thing you have to realize about bears is that they’re never wrong. They simply are early to a notion that the rest of the world has yet to realize. Whether it’s the next bubble that’s about to burst or a correlation to 1929′s Great Depression, the bears are always able to find a crisis that has yet to materialize.
If the market ignores their conviction and continues higher, they simply chalk it up to irrational exuberance of the masses and go into hibernation for a short period. Then when an opportunity presents itself, they trot back out the same arguments and try to convince you that the top is in.
I have watched bears call for a pullback over the last 100 points in the SPDR S&P 500 ETF (SPY). From a low of $125 in 2011 to a high of $185 in 2013 is a gain of 48% in SPY. Many bears have completely ignored this rally and have been left in the dust in terms of relative performance to the broader market.
However, I can pretty much guarantee that when we do see a 10% to 15% dip in the markets that they are going to tell everyone “they called it.”
2. No White Flag When the Selling Is Over
One thing I have always noticed is that when the market goes down 10%, it looks like it’s going to go down another 10%. That’s just the emotional nature of watching the market fall and living in fear that it is going to continue its descent. The psychological circle of panic and greed can be vicious.
Just remember back in 2009 when the market had already dropped 40% from high to low and everyone felt it was probably going down even further? Then quantitative easing kicked in, the selling stopped and stocks rocketed higher. No one raised a white flag and said the coast is clear. You just had to either be in stocks or you got quickly left behind.