…And the Bull Shall Lie Down with the Bear

Beyond Buy-and-Hold #17


What?s a bull?

What?s a bear?

These terms come from the pre-Buy-and-Hold Era. In those days, it was all about timing the market. The operative slogan was ?Buy Low, Sell High.? That?s timing. Short-term timing. The kind of timing that doesn?t work.

The most important thing that the Buy-and-Holders got right was their idea that we all should be focused on the long term. In a world in which most investors were focused on the long term, short-term timing had to go and to a considerable extent it has. Unfortunately, long-term thinking has not yet permeated our consciousness to the extent it needs to for us to adopt an investing lexicon that reflects our new investor goals.

We still think of ourselves as bulls and bears, terms that make sense only in a world in which most investors are focused on the short term, even though we now live in a world in which most investors are focused on the long term. Huh?

The Bull and the Bear

A bull is someone who expects stock prices to go up in the next year or so. A bear is someone who expects stock prices to do down in the next year or so. Why does it matter? Why do we care? If we are long-term investors, none of this is relevant anymore.

The future of investing is a world without bulls and bears. If we cannot effectively predict short-term price moves, we shouldn?t try to predict them at all. So we won?t.

But we will care about long-term timing. Changing our focus from the short-term to the long-term rules out short-term timing. And for a time some people thought that it ruled out long-term timing too. But we now know that that doesn?t follow. So long-term timing is part of the future of investing.

The words ?bull? and ?bear? are not.

I?m not a bear?no matter what anyone might think

People often call me a bear because I have been saying since 1996 that stocks offer a poor long-term value proposition. No. I make no calls about how stocks will perform in the next month or the next year. I am not a bear. I do not make guesses as to where stock prices are headed in the short term. I acknowledge the objective reality that stocks offer a better deal when they are selling at fair prices than they do when they are selling at crazy prices.

The trouble we are having as a society making the move from Buy-and-Hold to Valuation-Informed Indexing is due to the expanse that we have to travel to make the shift. The point that I am making in this column is that we actually need a new language to make this change. Words like ?bull? and ?bear? do not make sense in the post-Buy-and-Hold world.

Say that you were buying a car and you made an effort to get the best deal possible. Would people call you a ?bear? because you threatened to walk out of the dealership unless the dealer agreed to a reasonable price?

The truly critical factor: valuation

No one would do this. Everyone understands the need we all face to get a good price on the cars we buy. We need to change our understanding of how stock investing works to appreciate why this same need applies in the investing realm. You do not want to overpay for stocks. That doesn?t make you a bear. It merely shows you to be sane. It merely shows you to be rational. It merely shows you to be smart.

I have been arguing on the internet for sane, rational, smart investing strategies for over eight years now. It pains me that many good and smart people whom I consider friends have become angry with me because I have made the case for why stocks offer a bad deal at the prices at which they have been selling since 1996. One of my biggest complaints with Buy-and-Hold is that it makes those who follow it so emotional. A strategy that causes the anger and hate and shame that I have seen cannot be something good.

The problem is that many Buy-and-Holders are living with one foot in the old world and one foot in the new. They understand that long-term investing is the future but they still use terms that were developed in the pre-Buy-and-Hold Era. They think in terms of bulls and bears, and presume that anyone who sees anything wrong with stocks must fall into the ?bear? category. But it is not so. Being price-conscious is not being bearish. These are very different concepts.

I want to be friends with the Buy-and-Holders. They have taught me many wonderful things. And I believe that I have some things that I could teach them in return. We are all on the same side; we all want to know what it takes to invest effectively. We all should be working as hard as we can to learn as much as we can from as many different sources as we can.

For now, though, the ?bear? is seen as the enemy of the Buy-and-Holder and anyone who has anything negative to say about stocks (even something as obviously true as a claim that they are not worth buying at insanely high prices) is classed as a ?bear.? This must change if our society is to recover from the damage done to it during the years that many of us came to believe that price doesn?t matter much when buying stocks.

?Tis the season, isn?t it?

This is the season for dreaming dreams of peace on earth for men of good will. I pledge to do what I can in the coming year to better understand the Buy-and-Holders and to do what I need to do and have so far failed to do to help them better understand me. I am not an enemy to them and they are not enemies to me. We all are lucky enough to live during a time when breakthrough advances in mankind?s understanding of how stock investing works are coming so quickly that it is hard to keep up. We all need to keep the big picture in mind and celebrate the insights we have been able to develop together.

Buy-and-Holders are not ?bulls? anymore than I am a ?bear.? They do not believe in guessing which way prices are headed in the short term anymore than I do. We have that in common. I think that?s part of the communication problem — Buy-and-Holders and Valuation-Informed Indexers have so many things in common that it causes a bit of a freakout when it becomes clear that there is at least one point (the importance or lack thereof of valuations) on which there is disagreement.

We will work it out and we will all move together into a brighter future for all of us. The bull shall lie down with the bear. It?s when things turn very dark and very cold that you know for sure that the season of light and hope will be arriving soon.

Rob Bennett enjoys poking holes in money myths. His bio is here.

( Photo by Raul DS )

5 Responses to …And the Bull Shall Lie Down with the Bear

  1. Say that you were buying a car and you made an effort to get the best deal possible. Would people call you a ?bear? because you threatened to walk out of the dealership unless the dealer agreed to a reasonable price?

    If you hadn’t owned any car since 1996 because you thought all cars had been priced above fair value since then, people would certainly think you a little strange.

  2. You’re right, Evelyn.

    And you are putting your finger on something important.

    People find it [i]exceedingly[/i] strange when I report that the numbers show that stocks have not been worth buying since 1996.

    My view is that I am just reporting what the numbers say and that I am obligated to report what the numbers say accurately. Many people feel that the numbers I report are so “out there” that they cannot possibly be right.

    This is pretty much the entire debate. Should we believe numbers which seem crazy? Numbers are supposed to be straight-talking things. But in this case the numbers are telling a crazy story. What is the right way to go in such circumstances?


  3. Stocks not worth buying ?

    I’m confident that stocks will provide a good return in 20 years and 30 years, Evelyn. That point is well taken.

    The concern is what stocks will do over the next 5 or 10 years. Remember that to obtain those 20-year returns, you first need to hold the stocks you buy through the 5-year and 10-year time-periods,


  4. Hi, Rob,

    You say some interesting things. I just don’t quite understand how you put the pieces together.

    You’re quite right — and I’ve never seen anyone else point this out — that if you’re buying and holding for the long term, what the market does next year is irrelevant to you, so forget about the terminology of bull and bear markets.

    I would even add that you should prefer bear markets in the short term before you retire, so you can buy more shares of stock with your ongoing contributions and reinvestments of dividend income.

    You lose me when you talk about the market being overvalued since 1996 because, although it’ll be great in the long run (which I’m investing for), I still have to get through the next 5 or 10 years, and it’s overvalued for that.

    First of all, after I buy, I don’t care what the market price is. I want the income. Keep the dividend checks coming, and hopefully growing every year. That’s what I want. If I never sell, I don’t care what the market price is.

    People who care about the market price of stocks in the next five or ten years shouldn’t be buying stocks now. They’re too risky. If your implication is that the market is not likely to gain a lot over the next decade, I say you have a good chance of being correct. Once us baby boomers start selling off stocks en mass, look out below!

    But that will make it a good time for young people who won’t retire for another two or more decades to load up.

    Cheaper stocks are better than expensive stocks, but there’s no proven system of objectively valuing stocks — except the market. Mr. Market may be schizo, but you can’t predict when he’s wrong or right.

    So I can’t see how we’re in a “post Buy and Hold” world. If you’ve been waiting since 1996 for stocks to return to that year’s price level before you buy them, you may someday be rewarded for your patience — or maybe not.

    You don’t know. I don’t know.

    But in the meantime, you’re missing out on dividends every quarter.

    Australian Real Estate Investment Trusts

Leave a reply