History tells us March 9, 2009 was the end of a severe bear market that saw nearly every asset class tumble by close to 50%. What began in October 2007 amidst a profound slide in real estate values became a free fall in September 2008 when Lehman Brothers declared bankruptcy. If you listened to the media during this turbulent period, you could not help but be pessimistic. Indeed, just five days before the current bull market began in March 2009 only 18.9% of individual investors were "bullish" on U.S. stocks (source: AAII).
George Soros, a famous hedge fund manager, remarked "the worse a situation becomes, the less it takes to turn around-- and the bigger the upside." How many media forecasters were predicting the explosive rebound in financial assets such that the S&P 500 stock index matched its previous high by March 28, 2013? Since then, the S&P 500 has set an additional 107 all-time closing highs, including 44 more in 2013, 53 in 2014, and 10 year to date in 2015 (source: BTN Research).
How do we explain the widespread pessimism driving current volatility? University of Pennsylvania's Philip Tetlock, who studied the predictions of political forecasters, writes: "The better forecasters were... self-critical, eclectic thinkers who were willing to update their beliefs when faced with contrary evidence, were doubtful of grand schemes, and were rather modest about their predictive abilities. The less successful forecasters were like hedgehogs: they tended to have one big beautiful idea that they loved to stretch, sometimes to the breaking point. They tended to be articulate and very persuasive as to why their idea explained everything. The media often love hedgehogs."
This commentary is not intended to deny the inevitability of market corrections. Instead, I want to affirm the truth espoused by another famous investor, Peter Lynch, who reminds us, "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections." In the face of volatile markets, John Bogle, founder of the Vanguard Funds advises "Don't just do something. Sit there!" That is easier said than done when "hedgehogs" confidently tell us otherwise.
It seems human nature is always in conflict with successful investing where patience helps to neutralize risk. The lessons of this aging bull market then, are also the lessons for the next bear market. We may fantasize about our ability to dodge the bear, but for most investors, the real opportunity lies in being positioned for the next bull market. The sooner we lay aside the pessimism of short term thinking hedgehogs, the better we can enjoy the historical veracity of long term optimism. In this grand season of thanksgiving, let's remember the words of J.P. Morgan over a century ago who stated flatly, "Any man who is a bear on the future of this country will go broke."
*Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.