The Prudent Bear Fund: Too One-Sided, Even in This Market

 |  Includes: DIA, DOG, SDS, SPY
by: Stock Traders Daily

I just finished listening to David Tice, the manager of the Prudent Bear Fund, on CNBC. Immediately following that commentary I had a comment from a member which compared The Prudent Bear fund to The Investment Rate. Please do NOT confuse the logic here.

He manages a fund which bets entirely on the appreciation of precious metals and the decline in individual stocks. This has been the objective of his fund for 10 years. His fund has a negative return over that timeframe with an extreme level of volatility. Through thick and thin, his fund has operated with the same objective. Nothing has changed now, other than Market conditions, he just happens to be on the right side of the curve this time; over time his fund will experience significant losses again because the Market indeed goes up over long periods of time.

The Prudent Bear Fund is managed to take advantage of market declines, and although the fund has a negative return over 10 years, it will probably perform well over the next few years if the market declines as I expect.

However, that fund will only take advantage of ½ of the potential Market returns. BEARX fails to participate in the up-swings and that creates extreme levels of volatility and occasional severe losses in the fund. This is what separates the Prudent Bear Fund from the Investment Rate Model that we use every day.

David Tice was asked why he believes the market will decline. This man is bearish on all stocks, but he did not have a confident answer. I am extremely disappointed. He should understand why stocks are poised to decline over time, yet he referenced the near term noise in our economy. The rationale for continued decline extends far beyond today's news as the Investment Rate tells us. We all understand why because we have read the Investment Rate, and I hope Mr. Tice takes the time to do the same.

Everyone knows that I am an extreme Bear. I believe the market is going to decline by 50 to 75% over the next five years. However, to be completely one-sided as Mr. Tice seems to be is imprudent from an investor's standpoint. First of all, the prudent bear fund does not normally participate in up markets. The only reason the prudent bear fund did not decline considerably during the most recent bull market was due to the heavy exposure to precious metals, gold in particular. Notwithstanding, the Prudent Bear Fund would have been down considerably.

In addition to poor performance, BEARX is extremely volatile. The risk reward offered by the Prudent Bear Fund is simply not worth it. While the volatility of this fund is extreme, the returns don't keep pace with the market over time.

Although I am a long-term Bear, and although I am confident that the market will indeed decline significantly over time, I have a concrete foundation, The Investment Rate, to prove my point of view. Further, I realize that we cannot afford to be one sided, long or short, over the next five years.

Yes, the market will decline significantly over this period of time, but there will also be significant turns higher like the one we are experiencing right now. Arguably, shorts are going to make a lot more money than longs, but because we play both sides of the curve the volatility in our portfolios is far less than that of the Prudent Bear Fund, with a significantly higher net return.

Please do not confuse our strategic plan and the Investment Rate with the objective of the prudent bear fund. We are not in the business of Doom and Gloom; I am NOT one-sided. We are in the business of proactive trading, on both sides of the curve, and this will be our approach forever. This time, it just so happens that the trend will be lower over time, so these strategies appear similar.

Please don't be one-sided because you will experience severe levels of volatility too. But, at the same time, take steps to protect your wealth from the significant declines that lie ahead because indeed they are coming according to my Model.