The Bears' Club, Part 1

Growling contrarians get together for some doomsday porridge.
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Editor's Note: Nick Paumgarten is a senior editor at The New York Observer, where this article first appeared.

Three eloquent bears gathered for breakfast on December 15 in an executive dining room atop the

Morgan Stanley Dean Witter

building in Times Square. The three bears were

Barton Biggs

, Morgan Stanley's chief global strategist;

James Grant

, editor of

Grant's Interest Rate Observer

; and

Alan Abelson

, the editor of

Barron's

.

The

Observer

had invited them there to discuss the art of being wrong. As perhaps the most visible, articulate and persistent pessimists during the long bull market of the '90s, they have refined the act of simultaneously holding fast and eating crow.

It was 8 a.m. Morgan Stanley was serving breakfast. Hours before, the transit workers strike had been averted, and Grant had closed the latest edition of his biweekly newsletter. He was so bushed, he ordered iced tea for breakfast. As the host, Biggs sat at the head of the table with Grant on his right and Abelson on his left.

Soon they were joined by a fourth,

Henry Blodget

, Internet analyst at

Merrill Lynch

. As the guy who triumphantly predicted the huge spike in the stock price of

Amazon.com

(AMZN) - Get Report

a year ago, he has become the face of the Internet stock boom. He is in many ways the embodiment of the weird new science that has so flummoxed Messrs. Biggs, Grant and Abelson: that of ascribing huge valuations to companies that don't make money. Essentially, Blodget is an Internet bull. The

Observer

had invited him as a foil.

Abelson:

Hello, Henry. Do you feel like a foil?

Grant:

He just feels rich.

Blodget

sitting down: I've been able to take advantage of my lucky advice.

Grant:

There's a piece of news.

Biggs:

Are we going to talk about the stock market or the Internet or what?

Abelson:

Do you know anything about the stock market, Jim?

Grant:

No. This reminds me of a fellow who was a compulsive gambler. He was so compulsive and so unlucky that his bookie began to take pity on him. He was betting on basketball games. He bet on the

NCAA

and lost every single round of the tournament. Finally he was down to his last five bucks, and he lost that. The guy went to his bookie and said, "I can't pay you." The bookie said, "Well, basketball doesn't seem to be working. Why don't you take a shot on hockey?" And the guy said, "Hockey? What do I know about hockey?"

So, the Stock Market

The Observer:

Does it matter whether one is right or wrong?

Abelson:

It's better to be right. There's no question. But we all can in one way or another justify our existence, because somebody has to be wrong, or else how would you know who's right? One of these years we're going to be right. Basically, our function is to piss in the wind. Somebody should be standing here pointing out that maybe things are getting out of hand, maybe things are not as rosy as they seem. But I certainly would rather have been right. In other words, I wish the

Dow

was at 500.

Grant:

Somebody once asked me, "If you had to do it over again, would you have been bullish?" And the only thing I could say was, Yes!

Laughter.

Biggs:

I'm a little different from them. Like a lot of people my age, I'm bearish and cautious, but I'm running a money management firm. The trick really is to survive through this period where we have been too cautious on the markets, but to remain flexible enough so you don't take such extreme positions with real money that you get wiped out.

Abelson:

There's a difference between emphasizing risk and forecasting the market. I mean, I think both Jim and I have written continually about bullish things. It tends to get lost, but we do. It isn't as if we think people should head off for the South Seas and forget about investing.

Grant:

It's not as if people with a skeptical cast of mind can't get through the day. It's not about being bearish as much as it is about being contrary, about having a sort of creative dyslexia about the world and about not accepting it, you know, when

J.P. Morgan

comes out and says, "Buy Amazon," you say, "Huh? Is that right?"

Blodget:

The question I'd ask is, over the past few years, in retrospect, is there something you missed in the analysis that now makes you feel like you made the wrong call? Not necessarily because of what the market has done.

Abelson:

It's the wrong call, though, Henry,

because

of what the market has done.

Blodget:

But you have to go back to the decision point. I have in mind something that

Bob Rubin

said when he was Treasury secretary: "Just because the outcome is different from what you predict doesn't mean that the decision was wrong, based on the information you had at the time."

Biggs:

I made the wrong call, but a lot of the bears in general, the people who are cautious, the wrong call they've made is about the Internet and the dimensions and the speed of the Internet. Basically, these people have been right about the 80% of the market that is the old-economy stocks, which have been going down for a year and a half now. But I think we way underestimated the impact of the Internet.

Abelson:

I think what we all underestimated was how valuable losses are. We didn't realize that losing money was a way to get rich.

Join the three bears Thursday, when they discuss the conundrum of valuation posed by the Internet.

Nick Paumgarten writes for The New York Observer. He welcomes your feedback at

npaumgarten@observer.com.