NEW YORK (FMD Capital Management) -- I have a long history of watching bears destroy their wealth and that of others by living in fear of the next market meltdown. I used to work closely with an associate who felt it was their job to warn you about the next correction in stocks. In fact, this person was so whole heartedly committed to pushing their agenda that they were able to convince many investors that they knew what the future holds for stocks, bonds and commodities.
They must have had some sort of crystal ball under their desk that no one else knew about.
The most egregious error was not convincing people that a correction was going to materialize. Everyone knows that the stock market ebbs and flows just like the tides. We are going to experience periods of economic expansion and contraction that is a part of every business cycle.
However, it was dangling the notion that they can make you wealthy by being able to perfectly time the market to take advantage of both the upside and downside in a choreographed symphony of trading brilliance.
1. Never Wrong, Just Early
The first thing you have to realize about bears is they are never wrong. They simply are early to a notion that the rest of the world has yet to realize. Whether it's the next bubble that's about to burst or a correlation to the 1929 depression, they are always able to find a crisis that has yet to materialize.
If the market ignores their conviction and continues higher, they simply chalk it up to irrational exuberance of the masses and go into hibernation for a short period. Then, when an opportunity presents itself, they trot back out the same arguments and try to convince you that the top is in.
I have watched bears call for a pullback over the last 60 points in the SPDR S&P 500 ETF (SPY). From a low of $125 in 2011 to a high of $185 in 2013 is a gain of 48% in SPY. Many bears have completely ignored this rally and have been left in the dust in terms of relative performance to the broader market.
However, I can pretty much guarantee that when we do see a 10%-15% dip in the markets that they are going to tell everyone "they called it."
2. They Don't Wave A White Flag When The Selling Is Over
One thing I have always noticed is that when the market goes down 10%, it looks like it's going to go down another 10%. That's just the emotional nature of watching the market fall and living in fear that it is going to continue its descent. The psychological circle of panic and greed can be vicious.