Ben Bernanke, former chair of the Federal Reserve. “In 2020, Wile E. Coyote is going to go off the cliff and look down.”
Alan Greenspan, also former head of the Fed. “There are two bubbles: a stock market bubble and a bond market bubble.”
Scott Minerd, Guggenheim Partners chief investment officer. The market “is on a collision course with disaster” and the catastrophe will hit in late 2019, with stocks losing 40%.
Jim Rogers, founder of the Quantum Fund. “When we have a bear market, and we are going to have a bear market, it will be the worst in our lifetime.”
These four experts are telling us doom is ahead. Call it Wile E. Coyote moments, double bubbles, bear of bears or a collision course with disaster, the prediction is the same – wealth destruction is coming. These are the usual doomsday stories. They may be right but there seems to be a natural bias to the dark side. We seem to like it and pundits keep feeding us these narratives.
“I have observed that not the man who hopes when others despair, but the man who despairs when others hope, is admired by a large class of persons as a sage.” – John Stuart Mills
If you say the world has been getting better you may get away with being called naïve and insensitive. If you say the world is going to go on getting better, you are considered embarrassingly mad. If, on the other hand, you say catastrophe is imminent, you may expect a McArthur genius award or even the Nobel Peace Prize. – Matt Ridley
“Only pessimism sounds profound. Optimism sounds superficial,” – Teresa Amabile
“For reasons I have never understood, people like to hear that the world is going to hell …yet pessimism has consistently been a poor guide to the modern economic world.” historian Deirdre N. McCloskey
“Optimism appears oblivious to risks, so by default pessimism looks more intelligent.” –Mogan Housel
Experts traffic in negativity, but this may not help the portfolio manager who has to make investment decisions to increase wealth and protect principle. Conservative investing to avoid these dark scenarios has cost investors real money. So what is the best course of action?
We offer some simple solutions.
- Discount the negativity. Realize there is a bias; so discount the general level of negative commentary and focus only on the change in negativity.
- Find the alternative story. For every negative story, there should be a well-defined positive alternative. Find that story and see if it counters the negative. The same can be said for positive stories and finding the negative.
- Diversify. Diversification is the only cheap alternative to protect against negative events. Diversification may come in the form of building portfolio with assets that have low correlation or forming bar belled portfolios between cash and risky assets.
- Follow the trend. If there is high subjective uncertainty, follow the market trends that serve as a weighted average of investor opinions. You will be subject to reversals, but trend-following with some form of stop risk management creates option-like pay-offs that may serve investors well. This strategy should be tied with diversification.
Read the doomsayers, prepare for the possibility, but don’t be burdened with negativity.