No, comic book fans, this post is not about Victor Von Doom the Monarch of Latveria and recurrent nemesis of the Fantastic Four, and no we will NOT be discussing why I know that.
Since the financial markets are arguably the world's greatest argument in favor of perpetual optimism, it's not a surprise that skeptics and pessimists are routinely dismissed out of hand; however if one believes in Warren Buffett's #1 rule of: "don't lose the money, " it makes sense to always lend the pessimist an ear lest you get caught with your financial pants down:
From the NY Times:
On Sept. 7, 2006, Nouriel Roubini, an economics professor at New York University, stood before an audience of economists at the International Monetary Fund and announced that a crisis was brewing. In the coming months and years, he warned, the United States was likely to face a once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession. He laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unraveling worldwide and the global financial system shuddering to a halt. These developments, he went on, could cripple or destroy hedge funds, investment banks and other major financial institutions like Fannie Mae (FNM) and Freddie Mac (FRE).
The audience seemed skeptical, even dismissive. As Roubini stepped down from the lectern after his talk, the moderator of the event quipped, “I think perhaps we will need a stiff drink after that.” People laughed — and not without reason. At the time, unemployment and inflation remained low, and the economy, while weak, was still growing, despite rising oil prices and a softening housing market. And then there was the espouser of doom himself: Roubini was known to be a perpetual pessimist, what economists call a “permabear.” When the economist Anirvan Banerji delivered his response to Roubini’s talk, he noted that Roubini’s predictions did not make use of mathematical models and dismissed his hunches as those of a career naysayer.
But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities. When Roubini returned to the I.M.F. last September, he delivered a second talk, predicting a growing crisis of solvency that would infect every sector of the financial system. This time, no one laughed. “He sounded like a madman in 2006,” recalls the I.M.F. economist Prakash Loungani, who invited Roubini on both occasions. “He was a prophet when he returned in 2007.”"
Looking beyond the discussion of the current economic crisis, this article is more about perceptions, desires and expectations, more than it is about permabears vs. permabulls. In short, people don't want the bears to be right so they tend to ignore them and focus on when they're wrong. The converse is true for the bulls: People focus on when they're right and ignore the times when they're wrong.
After all, it's not like Mr. Roubini said anything totally out of left field because there was plenty of objective data floating around to support his thesis. Unfortunately people were too invested in the bullish view and chose to ignore the warning signs around them.
This reminds me of a co-worker who was convinced I shouldn't have purchased an Audi because "they always have problems" and used every time I went to the dealership as evidence of this, despite the fact that (during the time we worked together) my trips to dealer were to replace the brakes and tires at 40k miles, regular oil changes and replacing a few headlights at around 45-50k miles. It's worth mentioning that his Lexus was receiving virtual identical maintenance for similar items, so at the end of the day neither of us was truly driving a more dependable car (at least over that time interval).
Mind you, at the end of the day Lexus is more dependable than Audi. The problem is that he was misinterpreting every trip to the dealer as evidence of this rather then recognizing it as the same routine maintenance his car was receiving. It's no different then Bulls/Bears seizing upon a single data point to support their thesis/es and ignoring the larger body of data that doesn't. E.g. oil drops for a few months and everyone forgets the recent past and the longer term supply and demand issues, or every call of a bottom in housing over the past 18+ months.
The point is that people's general disposition towards the markets can color their interpretation of data that runs contrary to their own - you're overly accepting of data that supports your viewpoint and overly skeptical of data that doesn’t. Now while the market optimists are still winning (on aggregate), it doesn't change the fact that the successful investor knows when to be bearish and when to be bullish, so a balanced approach where one interprets data in an objective manner is clearly best.
Disclosure: At the time of publishing the author didn't own a position in any of the companies mentioned in this article.
