Why Investors Love Being Scared

How bears worm their way into our brains

It’s hard to believe that I’ve been writing online for over a decade. WordPress has been a wonderful home to more than 2,000 posts (Proud of those units).

It’s been a hell of a run, but it’s time to move onto bigger and better things.

I’m switching to Beehiv to improve how we (the Royal) interact with our readers, viewers, and listeners. This platform is a leap forward from what I was using previously, and I’m really excited about the change. Now, onto the post.

The first financial industry event I attended was Barry’s Big Picture Conference in October 2012. I remember seeing some guy named Jim O’Shaughnessy make the case for why the market was statistically cheap and the probabilistic outlook was bright. Back then, the S&P 500 was at ~1450 and approaching the pre-GFC peak. Let’s just say that the prevailing outlook at the time was, not great.

It took courage for Jim to get up in front of a crowd that would have been happy to hear anything other than, and I’m paraphrasing, “Things look pretty good, and those who bear risk should be rewarded if we’re looking objectively at fundamentals.”

Since then, the S&P 500 has increased 3.6x, which is good for ~12% a year—13.6% with dividends. Not bad, Jim.

So, did I run back to my computer and load the boat, given Jim’s comments? No, I did the opposite. I completely discarded what Jim said because someone else in the audience had the opposite message. It was, and again, I’m paraphrasing, “The world is going to hell, and the United States is looking a lot like the Roman Empire.”

My 27-year-old brain was no match for his intellect. Throw in a foreign accent, and I was ready to sell everything and load up on gold.

I’m not embarrassed to admit that I used to find bears more convincing than bulls. If I’m being honest, I’m still a sucker for a good bear case. I’m human. Optimism in the face of uncertainty looks naive. If you’re telling me everything is going to be okay, then what value exactly do you provide?

But if a thorough analysis of the current situation leads you to conclude that we should reduce risk, protect our capital, and be ready to redeploy at lower prices?

The thing is, being bearish is a mindset. It’s not a conclusion they reach after thorough analysis. It’s a philosophy that goes looking for supportive evidence.

I should mention that the bears I’m talking about are the forever bears. Those who are incapable of seeing the upside, ever. The doomsday prophets. The guys who have been saying the same shit for fifteen years.

I fell down the rabbit hole of Twitter bears the other week. One guy was talking about how bearish it is that Buffett sold a portion of his Apple stock. “Wait a minute”, I thought. Is this, “Holy shit, that is him!”

I hadn’t seen this guy’s name in a long time and completely forgot he existed. Then I googled “his name and 2012,” and sure enough, the same message for the last decade-plus!

This reminded me of a few others in his category that I stopped following a long time ago. So I looked up one of these fellows, and sure enough, nothing but bear porn as far as the eye could see.

It’s like some weird cult of ‘everything is fake, the fed is manipulating markets, sell now,” and the like. How can these people still have an audience after being so wrong for so long?

Ben and I talked about bears in a recent episode of Animal Spirits, and we got an email about the topic that hit the nail on the head.

I just wanted to send a quick thought on why permabear-ism is attractive.  There is a lot of overlap between permabears and conspiracy theorists.  What is so attractive about this outlook is that it involves the discovery of some kind of "secret knowledge."  And that is empowering.  There is a kernel of truth to most bearish takes (and conspiracy theories!). But they ignore that modern power systems (including market capitalism) are largely decentralized.  There is no one behind the curtain. Acknowledging that no one is in control is actually scary.

Josh and I are going to dive into this and more on tonight’s What Are Your Thoughts?