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March 19, 2004
George Paulos, Sol Palha & Alan Lunt

“Contrarian Round Table” contributors discuss the ethics
and psychology of bear market investing.

George J. Paulos
Alternatives for Financial Freedom

After a spectacular year-long rally in the stock market, investors are exuberant. Stock market bears have become an endangered species, but reports of their extinction are greatly exaggerated. Indeed, there are many reasons to believe that a return to bear market conditions may be imminent. If the markets turn down again, it won’t be pretty but bearish investors may be able to harvest impressive profits by betting on lower prices.

Regardless of market conditions, most investors are overwhelmingly bullish. They have been trained to hold stocks through thick and thin. The bear market of 2000-2003 proved that the average investor will hold stocks through devastating declines, much like a deer in the headlights. Few investors are even aware of techniques such as short selling, put options, or inverse funds that allow profiting within bear markets. For savvy traders, a fast moving bear market can provide stellar profits using these techniques. But a bear market implies that most investors are losing. Severe losses can lead to extreme resentment against those traders who profit from these environments. If you are a profitable bear trader, you should be sensitive to those who are losing while you are winning. In a very real sense, the money that you are making is the money they are losing.

Cocktail conversations about stocks are typically brag sessions about being long a stock that went to the moon. When was the last time you heard someone brag about a spectacular short sale? The next time you are at a party, try telling your best short-sale story and see what kind of reaction you get. Hopefully, your friends will be polite.

The most popular form of bear market investing is short selling, a practice where the investor sells borrowed stock from a broker with the obligation to purchase it back later, presumably at lower price, with the profit being the difference between the sale price and the repurchase price. Even though there is nothing illegal or unethical about short selling, it is still regarded in popular culture as a rogue practice. Many people consider it unpatriotic to sell short the country’s finest firms and profit from their troubles. Short sellers have always created resentment, particularly during bear markets when the majority of investors have lost large sums of money.

Stock investing is fundamentally an optimistic pursuit. Most people (particularly Americans) have a natural tendency to be optimistic. Short selling goes contrary to that natural tendency. This may be why short sellers are mistrusted. Short sellers are not necessarily pessimistic, they are just identifying a trend and profiting from it.

One of the most famous short sellers on Wall Street was Jesse Livermore who emerged from the 1929 crash with almost $100 million. Jesse certainly caused a lot of resentment among all of the ordinary people who had lost fortunes in the crash. Some even blamed Jesse and other short sellers for the crash. In response to investor outrage, the stock exchanges enacted rules to limit short selling that remain to this day. After the crash, Livermore often received personal threats and was forced to hire bodyguards. Sadly, Jesse lost his entire fortune in a mistimed investment strategy a few years later and eventually committed suicide. The tragic story of Jesse Livermore has become a parable for the “evils” of short selling.

Other well-known bears have been teased and ridiculed during bull markets, then shunned and reviled when their bearish predictions came true. Bearish analyst Jim Grant endured years of ribbing by Louis Ruckeyser on the Wall $treet Week television show during the long bull market. The same Mr. Ruckeyser fired “permabear” analyst Gail Dudack just months before the stock market peak in April 2000. The unfortunate Ms. Dudack disappeared into obscurity just as her bearish forecasts proved correct. Professional stock analysts know that a bearish outlook may permanently ruin a promising career. This may be why bullish analysts vastly outnumber bearish ones. There is little room on Wall Street for a bear.

Stock market bears are always in a battle with a perpetually bullish “Wall Street Industrial Complex”. These institutions are designed to sell securities to the public so they are always promoting stocks as safe and sound places to invest capital. Trading commissions by short sellers generate little revenue for the brokerage industry. In fact trading commissions in general are only a small part of investment industry profits. Management fees, investment banking, research, media, and a plethora of related activities make up the big money the investment industry. These institutions need a constant inflow of new capital to survive. Only a continuously bullish marketing message can lure investors to buy these products and services.

This bullish message is reinforced by the financial media who receive the bulk of their advertising revenue from the same industry that is after your investment dollars. They have created 24-hour “news” channels that are really nothing more than non-stop infomercials for stock investing. Most people get their financial information exclusively from these tainted sources. Financial media influence is powerful and pervasive. Most common investors simply reflect the bullish perspective of the information they receive from the media.

It is not the purpose of this article to discourage purchasing stocks. Quite the contrary. Stock investing is an essential part of a healthy economy. But there is a time to buy and a time to sell. The media will tell you that anytime is the right time to buy but will never tell you when to sell. Successful investors listen to the message of the markets, not the talking heads on the cable news network. The financial media will give no comfort or assistance to short sellers or any other species of the bear family. Short sellers must think independently and not be influenced by the media-controlled stock market pop culture.

It is important to remember that other investors may deeply resent all of the money you have made selling their favorite stocks short. You are on the other side of most investor’s trades and making all of the money that they are losing. Be careful how you describe your investment success. Be sensitive and generous to those who are losing. Don’t brag about your short-selling triumphs.

A bear market usually implies economic distress. Those who profit from this distress have an obligation to give back to society and help those who have been hurt by deteriorating economic conditions. Bear investors in particular should give generously to charity and work for the public good. This is not only for good karma, but to diffuse any resentment that would be generated by profiting from a bear market.

George J. Paulos
Alternatives for Financial Freedom
Copyright © 2004 George J. Paulos, All rights reserved

Sol Palha

While I agree with almost everything George has to say, especially the last paragraph, I have a few additional points I would like to make. Since my favorite topic in the market is the study of mass Psychology, my answer is going to revolve around it.

The real problem is not the levels of Euphoria, by any measure this market is ridiculously over valued and the profits most corporations are reporting are nothing but statistical lies. They are all due to the drop in the value of the US dollar. If one had to adjust those profits to take into account the drop in the value of the US dollar, all those lovely profits would disappear immediately. However despite all these lies, and distortions of the truth, the market still carries on rallying. What it really comes down is perceptions and unfortunately the majority of the world is like “Alice in Wonderland”, to them illusions are realities and reality appears to be an illusion.

The reality is that the markets should have crashed long ago and this so-called bull rally should never have ever occurred in the first place. But reality has never made anyone rich or wealthy. The illusion however seems to be winning because it is being driven by another very addictive factor. I call this  “the greed factor” and as the market goes higher this greed keeps rising to insane levels. Eventually just like swine’s they will be merciless slaughtered. The average investor wants to cling onto the illusion that the huge crash from 2000-2003 was nothing but a buying opportunity, that all is well now and the bull has re emerged and is all charged to keep going on forever.

The only way to win in a market is to be unbiased, there is a time to a bull, there is a time to be a bear and sometimes one has to simply be neutral. If you firmly plant your feet in one camp, start looking for a wheelchair, as they most likely to get chopped of sooner than later. Currently the market appears to be in an extremely euphoric mode and I believe that a lot of this Euphoria is being slowly dampened by the recent correction. This up down movement will continue for a while and it appears that this summer has the makings of being a very cruel time for all traders. I believe we are in for one more explosive up thrust after which the bear will viciously bite and destroy all the bulls out there. In the end the only one left standing will the man who has no bias.

And if you have made a fortune being a bear or bull, make sure you take time to donate some of that money to a worthy cause. Since you actually took that money from someone else and your fortunes are now many people’s misfortunes.

© 2004 Sol Palha

Alan Lunt

After a particularly long winter brr bear wakes up, its his time to go and rummage for his meal. Typically he is very hungry and any morsels are accepted with glee. But as the season goes on he becomes more discerning and begins too pick and choose his fodder. At this stage in the market he has just had his first taste and some of the morsels were not that agreeable. The shorts on the QQQs and Diamonds returned real stomach cramps, and he regurgitated everything he had from the futures pit.  The time has come to be discerning.

Just like it is with the bulls, when everyone has thrown in the towel there is a market turn coming. The bears should have a real glint in their eyes but instead they are standing back watching the first honey drip onto the ground. The perception is that the bears are market pessimists and really aren't nice people as they want the market to do what in reality it does nearly half the time, go down. When in all truth the saying "buy and hold" makes a person a bull and a bear and they get nowhere, hence "buy and fold". It sure is helpful if you have a known bias.

The top market people are those that can recognise when to be a bear or a bull. They know when to buy and when to sell. These people are admired by many and in some cases envied. What they should not be is pilloried for being correct, yet that seems to be the case for lesser mortals. If you have entered the market the chances are better than 50/50 you have lost money by forgetting to sell. This is where the true bear gets wounded by his contemporise if he has made money in a declining market, he is perceived to be the vulture picking at the bones of the unfortunates when in reality all he is doing is stocking up for his coming winter.

If Nicoli Kondratieff is more correct than Alan Greenspan and we are in the first stages of K-winter then the time of the bear is coming. He, the bear, knows what it is like to have slim pickings and I do not see him advertising his gains too much. He knows he has had to live on the same planet where the wins of others have been rammed down his throat. He will not repeat the mistake by gloating too much.

For bears like me it will be a time to watch and help where we can after we have pocketed all that lovely spondulie.

"It is less important to redistribute wealth than it is to redistribute opportunity."
-- Arthur Vandenberg, American journalist and senator (1884-1951)

© 2004 Alan Lunt

Contrarian Round Table Series

The Dow has never been in A true Bear Market  

Contrarian Round Table II- Central Bankers  

Contrarian Round Table III- Inflation good or bad?



We would like to thank Mary Puplava of for helping put all the articles from the various writers together and producing  a coherent piece of work. Without Mary the Contrarian round table series would not exist.