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2015/03/30

Do What the Bears Do... Not What They Say

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Monday, March 30, 2015 | Issue #2508
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Do What the Stock Market Bears Do... Not What They Say

Alexander Green, Chief Investment Strategist, The Oxford Club

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Alexander Green Here's a thought experiment for you.

Imagine you're a business owner who is attending an investment conference. A smart, articulate and extremely bearish stock market analyst takes the podium and warns of impending economic doom.

He marshals an impressive array of scary facts. He points to past predictions that have come to pass. And he claims the economy and stock market will soon collapse.

Would you go home and sell your business?

I'm guessing your answer is somewhere between "of course not" and "what, do you take me for an idiot?"

But if the economy were really about to collapse - and the value of your business along with it - shouldn't you sell it now while you can still fetch a good price?

You wouldn't - and for good reasons.

The first is you may need your business to provide an income. But isn't that the same reason you shouldn't sell the stocks in your investment portfolio? After all, they're not only supplementing your income - with dividends - but also building the capital base you need to meet your retirement goals.

You also surely realize that a bearish analyst is only voicing an opinion, the same as a bullish analyst. In your heart of hearts - if not your frontal lobe itself - you know that no one can accurately and reliably predict the future. (Although pundits generally do a good job of cherry-picking past predictions that have come to pass.)

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But here's another reason you might not sell your business: The bearish commentator isn't selling his. And that's a bit odd when you think about it.

I work in the financial publishing industry. When people give up on the stock market - as they did following the financial crisis of 2008-2009 - our business takes a sharp downturn. In a full-blown collapse, a business might fail completely. There wouldn't be enough revenue to meet expenses.

Yet I notice these passionate bears are never filled with enough conviction to sell their own business at "the top."

I had a direct confrontation with a perma-bear on this subject a few years ago. We were debating before an audience in New York and the moderator began by asking us to declare whether we were bullish or bearish on the stock market.

My opponent - who had been bearish not just for years but decades - make a quick pronouncement.

"I'm a bear," he said.

I said, in turn, that my investment approach is "market neutral." I don't know whether the market will go up or down, and my recommendations have nothing to do with economic forecasting or market timing. Both are meaningless noise and don't add value.

My opponent pounced immediately.

"You're recommending stocks. So just admit it. You're bullish. Just say you're bullish."

"I'm not recommending certain stocks because I think the market will go up," I said, "but because I think these businesses are undervalued. The market may go down and these stocks could still go higher."

"You're playing a game," he insisted. "If you own stocks you're bullish, end of story."

I disagreed and added that since I knew he owned a lot more equity than me, he was actually bullish not bearish.

He took great offense at this remark and insisted he didn't own any stocks.

"But you have equity," I said.

This fellow was an industry colleague of mine. He owns a successful publishing business. In fact, his publishing interests were probably larger than my entire stock portfolio. I pointed this out to the audience.

"By your own logic, you're bullish," I said. "Why don't you admit it? If you weren't, you would sell your business."

He seemed dumbstruck by this - and more than a little embarrassed. The audience was very possibly viewing him as a hypocrite.

He finally argued that there was a big difference between owning a private business and being a shareholder in a public one.

Except there isn't.

The issues facing a private publisher are the very same as those facing a public one: labor costs, printing costs, paper costs, mailing costs, advertising costs, advertising demand, economic strength or weakness, overhead, health insurance, information technology, etc.

In short, he wanted the audience to sell their businesses (the stocks they own), but he wasn't about to sell his.

I've found this to be a general rule in our industry. So here's the takeaway: Don't do what the great bears say. Do what they do.

Hold on to your equity. It's the best way to build and protect a fortune.

Good investing,

Alex



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