Don’t Confuse Stupidity with a Bear Market

“So when are we coming out with a tasset fund?”

“A tactical asset allocation fund?” I replied. “Mmm, it’s worth a thought, but you know what it takes to add a new product.  How much demand would there be for this?”

“Are you kidding? In a bear market, people still want to make money.  We need someone smart who can decide when to be in the market and when to take shelter in cash.”

“If it were only that easy,” I replied, “Tell me, who is so reliably brilliant at market timing, and willing to trade for anything other than his own account?”

“You got me there, Dr. Merkel, but we really need a product like this.  It would sell like crazy.”  (Note: they called me Doctor there regularly.  I did not encourage it; I am not a Ph. D.)

“No doubt.  I will consider it, and get back to you.”


I had that conversation back in 1994 with one of the better pension representatives of Provident Mutual.  As one of the actuaries there, I quickly realized that I had to boil any investment ideas down into very simple terms for the field force.  The best explanations were rich and simple, like a fairy tale, one of Aesop’s fables, or one of the parables of Jesus Christ.  That is a challenge — one worthy of the best investment minds.

The thing is, there is a constant war between two views of the market:

  • Buy and Hold — Bull Market
  • Trade, trade, trade — Bear Market

I don’t think either view has permanent validity.  Of course in a bull market the buy and holders will crow; they are making money.  And in a bear market, those with less exposure to the market will crow.  Big deal.  Those that are accidentally correct boast while their strategy is in favor.

So, when I read this NY Times article about diversification, I yawn.  After a bear market, you decide to reduce equity exposure?  That’s just fear expressing itself in stupidity.  Even worse is this WSJ article, where the author is giving into his fears, and reducing equity exposure.

My point here is a simple one.  Don’t confuse brilliance with a bull market.  Don’t confuse stupidity with a bear market.

Very few people are good traders, such that they can manuever the pulses of the market.  For those that understand how the market works in the long run and on average, the best thing to do is to ride bear markets out.  Own the best companies you can find, and adjust your asset allocation such that you can survive something worse than a bad recession.  Many people over-own stocks, implicitly trusting in the naive view that they always outperform bonds.  Stocks do outperform bonds, but by much less than advertised, say 1-2%/year.


When I look at the risk cycle now, I am inclined to reduce risk, and add to safe investments.  That said, I might wait a while to see if the positive momentum persists.  I am gratified by the rally in lower-rated corporate bonds, but think that the risk there is growing.  I am presently inclined to do an “up in quality” trade, sacrificing yield for safety.  There.  That is the way to go now.  Reduce risk, and take the loss in yield.