In Defense of (My Own) Perma-Bullishness

by: Eddy Elfenbein

Eddy Elfenbein submits: Barry Ritholz had a good post the other day on the awful track record of some of Wall Street’s perma-bulls. I will, however, come to the defense of the perma-bulls. Or at least, my own perma-bullishness.

Don’t get me wrong, I’m all for bashing the outlandish predictions of clueless market observes. I’m a perma-bull not because I think the market will soar dramatically higher. (I’m actually a little skittish right now.) I’m a perma-bull because I avoid trying to time the market.

If there’s someone out there who’s great at timing the market, that’s terrific. Good for you. There’s no need to send me dozens of e-mails detailing your track record. I believe you. Go do it as much as you want. But for me, it’s never worked. My market calls have been horrible, and I’ve never seen anyone who’s been able to do it consistently. Personally, I don’t even try anymore.

Remember that timing in the market involves two steps— when to get out and when to get in. Both parts are very tough to do.

What I find annoying is that it’s easy to attack people who were screaming “buy, buy, buy” at market tops, but no one ever seems to criticize the perma-bears. Why are these folks immune? If some guru has been saying stay away from equities for the last ten years, the fact is that he's been horribly, horribly wrong. And he should be told so.

Ironically, I use the benchmark of ten years and we’re coming up on the tenth anniversary of one of the stranger days in the market. On July 15, 1996, the S&P 500 dropped over 2.5%. The next day it dropped another 3.8% intra-day, before rallying and closing modestly lower for the day. Bear in mind that at this point, the market had been climbing steadily higher since late-1994. The market started to crack and in July, and it looked liked it might spiral out of control.

We now know that the market was really a screaming buy. If you had invested in the S&P 500 on June 30, 1996 and went to sleep for the next ten years, by June 30, 2006, you would have made over 122%. That’s about 8.3% a year. Forget all the big news stories of the past ten years: 9/11, The Tech Bubble, War, Clinton's Impeachment. Despite everything that happened, an investor would have doubled her money. In fact, after inflation she would have made almost the exact same amount as the market has returned according to long-term studies.

But that's not what people were thinking in 1996. For an interesting take, let’s look at this transcript from PBS NewsHour of July 16, 1996:

ELIZABETH FARNSWORTH: Is one of the great stock market runs in history coming to an end? That's the question for Wall Street and for many on Main Street after recent large drops in the market, including yesterday's Dow Jones loss of 161 points. Today saw wild swings, with the Dow rising more than 45 points early, then falling more than 167 points during the afternoon, and coming all the way back up 50 points before closing up 9 1/4 points. What's going on? To help us understand, we're joined by Susan Kuhn of Fortune Magazine. Thanks for being with us, Susan.

SUSAN KUHN, Fortune Magazine: (New York) You're welcome, Elizabeth.

MS. FARNSWORTH: Why the wild swings today, what was going on?

MS. KUHN: Well, Wall Street is having another one of its fun days this summer. Basically the market hasn't been doing very well in both June and July. This comes after a long spectacular run, so I think it's catching many people by surprise.

MS. FARNSWORTH: So today was--it was something of a correction over yesterday, but it, it's been dropping so much. Why?

MS. KUHN: Well, I think there's a lot of concerns. The first is we really haven't had a break in the market. It's been going straight up, and you have to wonder, boy, when are people going to start to get nervous, when are they going to take a break? The cause for this one appears to be corporate earnings. Many companies have been reporting earnings for the second quarter that are not matching investor expectation. That seems to be the excuse for people to sell. I was talking to people at Fidelity Investments today, and they're finding that the volume of calls from individuals and stock funds was up 30 percent over the past few weeks. So clearly many individuals who may be in stocks for a variety of reasons are starting to get nervous.

MS. FARNSWORTH: And this has been particularly true though. The decline has been particularly marked in technology, high technology stocks, computer companies, that sort of thing, is that right?

MS. KUHN: That's true. And technology, Elizabeth, really has been the story of the 90's. All of us can see we're getting new computers shipped to our desks. Our children are learning how to play computer games, and if we don't know how to surf the Internet, we sure feel guilty about not knowing it. Wall Street hasn't missed that story. In fact, it likes a good story, so it's been bidding technology stocks up. But, of course, what goes up--what must come down, and that's what we've really been seeing in, in the last couple of weeks. Technology has been taking it pretty hard.

Notice how much of that could be say today. If you look for a reason to be worried about the stock market, guess what? You’ll find it.

Investors always believe that they're in the middle of the some period of two extremes. People are always waiting for "the dust to settle." If you look at any period, that's what's on investors, "we're waiting for the dust to settle."

If we play with the data a little bit, we can say that the S&P 500’s entire return over the last 10 years came on just 15 days (not including dividends). That’s over 2,500 trading sessions. This means that the stock market was net flat over 99% of the time. All your money was made during that 1%, or roughly one day every eight months. In other words, the dust is most likely settled, and it has been for quiet some time.

Truthfully, I’m getting a bit too clever with numbers here, but it is factually correct. To be a successful market timer, you need to be that good. You have to hit that 1% all the time. Being a perma-bull, I know I’ll always hit it.