Broker Check

Is It Time To Sell Everything?

May 09, 2024

This week, I read an article on a popular financial news website, and this advertisement appeared at the end.

Ads like this drive me nuts because they are so effective. Michael Burry was one of the few who predicted the financial crisis, and his bet against the housing market made $100 million for himself and $700 million for his investors1. Christian Bale even played him in The Big Short. Who wouldn’t want to learn more if he sees something concerning again?

Unfortunately, this website didn’t show the chart below alongside the ad. Mr. Burry is no dummy, but this is just a small sample of the bearish calls he has made that were fantastically wrong since then.

He's not the only one, either. Michael Cembalest at J.P. Morgan has been tracking a group of “Armageddonists” since 2011. These are the perma-bears that love to go on TV to talk about how the sky is about to fall.

He computed the returns investors would have missed by switching from stocks to bonds on the date of each bearish prediction. The chart below shows the resulting underperformance ranged from 30% to 60% by the end of 20192.

Shortly thereafter, it looked like this cohort would get vindicated during the lockdowns in 2020. Here’s a small sample of doomsday predictions from some of the more vocal perma-bears around then.

However, any investor who fell victim to such prophecies lost big. Here’s a chart of the S&P 500 since 2020, with each red dot representing the timing of a call in the table above. Selling around any of these would have been devastating.

The stock market had a great first quarter of the year, but it’s pulled back since then. I’d wager that’s why I’ve been seeing these ads lately. Expect even more if the stock market remains volatile through the summer.

The bottom line

Pessimism is hypnotic because it sounds smart and attentive. It’s a warning and a call to action all in one. Do something before it’s too late. Pessimists see what others cannot, and they are trying to help.

Conversely, optimism is laziness. It’s doing nothing and sticking to the plan. Be oblivious to what’s happening right in front of us. Optimists are glorified salespeople who are only self-interested.

Pessimism gets more airtime and grabs more eyeballs on the internet because when bad things happen, lives change. But optimism has rewarded investors far more over time. It’s not even close.

That’s not to say the answer is ignoring pessimism, either. Pessimism provides balance. For example, short sellers profit from stocks falling, and they serve a vital purpose because they tend to expose fraud and other corporate issues.

However, bad actors recognize the power of pessimism and use it for financial gain. Concocting a bear case is easy, and technology is so good these days that the ads are highly targeted. Are you reading an article on rising government debt? Here’s an ad on gold. Did you search on “rising stock valuations?” Click here to subscribe to a newsletter explaining why another market crash is imminent (the first article is free!).

Brett Arends is a financial writer who wrote3:

“Three simple rules will explain 99% of human behavior: (1) Most people don’t think, (2) Some people are just jerks, and (3) Everyone is selling something.”

Fearmongers who preach popular financial conspiracy theories, like the U.S. dollar collapsing, rarely manage money. Instead, they sell stuff like newsletters and books, and fear sells phenomenally well.

When they do manage money, they’re usually just “talking their book,” or trying to convince others to trade in a way that benefits their investments. Either way, they’re just trying to make money off you more than help you.

Here's a reliable test I use to determine a pessimist's intentions: Show me a time when they made a bullish call and were ultimately correct. Only then can I consider them impartial. Tests like this one should become a tool in every investor’s arsenal because this is classic whac-a-mole. Discredit one fearmonger, and there are five more to take their place.

What makes matters worse is that one of these clowns will eventually be right. The market will drop for some reason, and they’ll take their requisite “victory lap” around the media circuit to tell you why their system worked once again (even if the market decline occurred for reasons unrelated to their thesis). As the saying goes, “A broken clock is right twice a day.”

The bottom line is that the world does not end often, so those who preach it have only one objective: to increase the size of their wallets.

 


 


Sources

1 https://www.investopedia.com/who-is-michael-burry-5235600

2 https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/eye-on-the-market/five-easy-pieces-amv.pdf

3 https://www.marketwatch.com/story/25-things-i-wish-i-knew-when-i-graduated-from-high-school-2015-06-15

 

 

Disclosures

This material has been prepared for informational purposes only and should not be construed as a solicitation to effect, or attempt to effect, either transactions in securities or the rendering of personalized investment advice. This material is not intended to provide, and should not be relied on for tax, legal, investment, accounting, or other financial advice. You should consult your own tax, legal, financial, and accounting advisors before engaging in any transaction. Asset allocation and diversification do not guarantee a profit or protect against a loss. All references to potential future developments or outcomes are strictly the views and opinions of Richard W. Paul & Associates and in no way promise, guarantee, or seek to predict with any certainty what may or may not occur in various economies and investment markets. Past performance is not necessarily indicative of future performance.