5 Rules to Follow Next Time You’re Tempted To Believe A Permabear

Keith Fitz-Gerald Jun 22, 2016
43 

Today’s column will contain some of the most valuable investing advice you’ll ever read.

But, be forewarned. You won’t see this anywhere else.

What I have to say is much more direct…blunt even.

I’ve chosen to publish this column today because I want every investor who reads it to have a fighting chance in the months ahead at a time when the headlines are hopelessly negative and running for the hills seems like a prudent thing to do.

Not 1 in 1,000,000 investors will come to terms with today’s message, which is too bad considering how much wealth will be created by those few – like you – who do.

Even if they don’t want to believe it.

The Perspective to Turn Pessimism into Profits


Years ago I was a typical newbie investor trying to make sense of the financial markets. Like many people in the early 1980s, I found it difficult to come to terms with the collapse of the Soviet Union, runaway inflation that was a legacy of the 1970s, a recession, oil deregulation, and more when it came to my money.

The headlines were extremely negative, leading some very smart people to conclude that the economic woes of the time were insurmountable and, by implication, investing was not worth the risk.

My grandmother, Virginia “Mimi” Gruner didn’t see things that way.

A self-taught investor widowed at a young age, she was making thousands of dollars a month at a time when that was inconceivable, and her portfolio was doing exceptionally well.

I asked Mimi how she was doing that. What was she buying?

She told me, and my understanding of how markets worked changed overnight.

What did Mimi say?

Was it about which companies to buy? Cutting risk? Finding undiscovered stocks?

No.

Psychology.

Mimi simply looked across the dining room table and said:

                …people want to believe the world is going to hell in a handbasket.

That was a major “a-ha” moment for me.

Suddenly I understood why most investors cannot buy low and sell high, why they try to time the markets even though that almost never works and why they cannot remove emotion from the equation even though they know it’s the single biggest thing standing between them and the profits they crave.

More importantly, I also understood how to find the biggest, most profitable opportunities when others saw only chaos.

Shortly after Mimi and I had that conversation, I stumbled into research from Carnegie Mellon’s Michael F. Scheier and the University of Miami’s Chuck S. Carver who, as it turns out, were the first to put together the scientific linkage between optimism and expectation in a groundbreaking 1985 study.

They found that optimists are “problem solvers who try to improve the situation.” Pessimists simply let their behavior get the better of them.

Which brings me back to Mimi’s point about why negative headlines make the news.

Simply put, it’s easier to believe pessimists.

Optimists sound like they’re throwing caution to the wind. The term carries an almost reckless connotation, especially today when the risks we face are seemingly higher than they’ve ever been before.

When it comes to your money a bearish view just sounds…well…smarter.

The unspoken message is that pessimists have somehow dug deeper or gone beyond the obvious to develop a nuanced view to explain what’s around the next corner.

You can’t blame people for feeling this way given the downright apocalyptic headlines at the moment:

TW1

Yet, Mimi would tell you pessimism only sounds intelligent because investors subconsciously interpret it as a protective reflex – and here’s the important part – even when the data shows beyond any shadow of a doubt that staying the course is the far more profitable course of action.

Bond “King” Bill Gross famously predicted the Dow would sink to 5,000 in 2009. It’s risen 152% since its 2009 nadir, as of Wednesday.

In 2010 Elliott wave expert Robert Prechter called the Dow at 1,000 and a looming market crash of staggering proportions. It’s up 73% today.

Demographic researcher Harry Dent took the Internet by storm in 2011, claiming the Dow would fall to 3,000. After a mere 13% dip that year, it’s up more than 63% since.

Peter Schiff, President of Euro Pacific Capital, predicted that the Dow would collapse to 2,000 in 2010. Today it’s up 78%.

In March of 2014, Dent piled on, saying that the Dow was setting itself up for a major crash that would give investors a 50% haircut and take the average to 6,000 by 2016. Today the average trades around 17,805.

Unfortunately, as bright as these individuals are, what they’re doing is a lot like predicting 10 out of the last two recessions, and about as useful as worrying there will be 18 feet of snow in July based on three inches in November.

Eventually, though, they’ll get it right and claim vindication.

I’d rather see you claim profits.

Case in point, my team and I have helped readers identify literally hundreds of double and triple digit winners including 326%, 174% and 214% with Altria, American Water Works, and Raytheon, respectively, even as the folks I just mentioned along with legions of others were warning of financial Armageddon.

How?

By keeping the following Five Total Wealth Principles in mind no matter how scary the headlines get:

    1. Capital is a creative force and the foundation of wealth which, in turn, is the embodiment of ideas. It is constantly growing and has been since the dawn of time. Sometimes growth slows, as is the case at present, but it will not stop.

TW2

    1. The markets have an upward bias, which is a function of constantly increasing amounts of money chasing fewer quality stocks over time. You can argue that the markets go up and down and you’d be right. But that does not change the fact that the general direction over time is UP. The only question is how you handle the swings, and that comes down to proper risk management.

TW3

    1. Technology increases total market size every time in every industry. Many pessimists base their argument on extrapolation. It’s logical, for example, to assume the markets would go to zero if you looked at what happened in 2009 when the bottom fell out and millions of investors believed the end of the financial universe was upon us. But that’s a lot like saying we’ll have 18 feet of snow on the ground in July based on 3 inches falling in November and about as accurate.

If you’re going to extrapolate anything, understand that technology is the one constant capable of increasing market size everywhere it occurs. This means a constantly expanding stream of ideas that are ultimately translated into earnings and, in turn, into higher stock prices over time.

TW4

Figure 1 – SEC.gov

      1. Profits follow innovation. Pessimists take doom and gloom personally and view it as a form of ultimatum. Optimists, on the other hand, view doom and gloom like I do and Mimi did – as an opportunity to try something different. Anything negative is only temporary which is why you should keep in mind that innovation has never failed to produce profits. Ever.

TW5

      1. Disruption crosses every economic strata. Pessimists want everybody to fail whereas optimists want even pessimists to succeed. That’s why disruption and why disruptive technology, in particular, is so powerful and so capable of overcoming even the worst pessimism.
TW6

Figure 2 – Wikipedia

In closing, I realize that we’ve covered a lot of ground and I know it will take a while to sink in, especially if you’re prone to pessimism as many investors are at the moment.

Mimi and I had our conversation 36 years ago and I still struggle from time to time to separate how I feel about a particularly nasty headline from what I know about money and profits. Not every prediction I’ve made has been on the mark either but I’ve never let that get in the way of profit potential.

You shouldn’t either.

Speaking of which, I’ll be in Las Vegas on Thursday, July 14 with my friend and colleague, Alex Green from the Oxford Club where we’ll be taking on Bert Dohmen and Peter Schiff as part of the Big Bull versus Bear Debate at FreedomFest. I’d love to see you there!

Until next time,

Keith

43 Responses to 5 Rules to Follow Next Time You’re Tempted To Believe A Permabear

  1. Walter Gehring says:

    A lot of food for thought. Thank You

    • Keith says:

      Good morning Walter and you’re welcome!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  2. Guy Azbell says:

    I can not get the videos on my device or phone so i am out of luck.

    • Keith says:

      Hi Guy.

      Sorry to hear that. I use a Droid and my phone just got an update that killed it until I restarted. Perhaps something that simple may help.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  3. fallingman says:

    The use of the terms optimist and pessimist are simpleminded and almost completely out of place when used in the context of investment strategy.

    What is someone who has been long equities from March of 2009 and is now selling on the basis of his or her analysis … an optimist or a pessimist? What is someone who sold in 2007, but turned around and went long in the spring of 2009 … an optimist or a pessimist? Or just a good analyst … a good judge of how the risk/reward tradeoff sets up at any given time?

    Optimism and pessimism are best described as more or less permanent identifying personality traits. Investment stances shift, and rightly so. It’s why we use the terms bullish and bearish. Those indicate how someone is thinking and how they’re positioned at the moment. The terms aren’t interchangeable.

    There are a lot of money managers who think the markets are at great risk here, but who are long at this stage, because they have to be. They don’t like it, but they manage money and have to be in the game? Does that make them optimists or pessimists? The terms become meaningless. It’s a sloppy use of language.

    Your rant against “pessimists” becomes then , in effect, simply a cheap shot at anyone who disagrees with you, cloaked in the language of penetrating insight.

    As for the upward bias. Yeah, so far. And you might be right playing that upward trend a while longer, just as the guy playing Russian roulette can be right for 5 whole trigger pulls, but that doesn’t mean it’s smart to play, and it doesn’t mean that the guy who said no thanks, is a pessimist. He reckoned the game to be deadly and decided wisely not to play, even though the guy who played made lots of money on the bet each time he played. But you would ridicule the guy who “missed out.”

    Rome had an upward bias too, for centuries. As did the Portuguese, the Spanish, the Dutch, and the British, etc. etc. And upward trends reverse at some point. Could that point be now? Yeah . You make it sound as if the upward trend is inevitable. It isn’t.

    That’s not to say your approach isn’t the best way to proceed. It may be. I don’t know. Markets could proceed higher to infinity. No way to know. It’s just to say that past performance is no guarantee of future results. There’s a reason that disclaimer’s emblazoned on performance records, prospecti and financial offers of any kind, because sell side con men love to use past performance to persuade the unsophisticated to buy … often at the very worst times.

    • Paulina says:

      Profitable…that’s what you call somebody who’s been long equities since March 2009. I think you miss Keith’s point entirely. Pessimism is an emotional trait and, as such, can have a profound impact on investing and on asset prices. Better to be long than wrong. That’s why he’s pointing us – rightly – to the market principles here.

      • fallingman says:

        You just made MY point.

        Profitable. Well said. Optimism had NOTHING to do with it. A thoughtful analysis of the particular setup in March 2009 did, not some personality-based inclination to always be long the market simply because the historical trend has been up. I get that one would rightly consider the long term historical uptrend a positive factor in one’s analysis, but recognize it as a very weak positive.

        In sociological / psychological terms, what Keith and the rest of the commenters here are falling victim to in my opinion is normalcy bias. Throw in recency bias and you have a potentially deadly combination in my opinion. But by all means, keep picking up the nickels in front of the steamroller. Maybe you’ll do just fine. I DON’T KNOW. All I know is the logic is flawed and the use of language is sloppy. He says I’m splitting hairs. I’m defining terms.

        The use or misuse of language matters for many reasons, but the one you should be most concerned about is that the sloppy use of language indicates sloppy, imprecise thinking, leading to the making of mistakes, because the logic’s off.

        Ha, yes. Pessimism IS an emotional trait. My point again exactly. You can be “pessimistic” and yet bullishly positioned, as I pointed out many money managers are, which renders the use of the terms optimistic and pessimistic meaningless.

        My opinion is different. Better to be out of harms way than to be wiped out. But they didn’t listen to that argument in the summer of 1929 and you won’t listen to it now. Instead, you’ll come up with or buy into specious arguments telling you why “it’s different this time.”

    • Keith says:

      Dear Fallingman,

      Respectfully, I think you’re splitting hairs. There are dozens of studies pointing to the link between emotional impact and asset prices. Investors who lived through the Great Depression, for example, tend to be more pessimistic than younger investors who did not live through such devastating economic change. Studies like those from Malmendier and Nagel (2011) and Collin-Dufresne, Johannes and Lochstoer (2014) that only small amounts of optimistic investors – agents in academic terms – are needed to eliminate the risk premium associated with disaster. Here’s the link if you’d like to read the paper I’ve just referenced. That’s why it’s always important to return the principles I outlined – because that's how you re-instill optimistic agents when the market isn't or specific people won't allow it for whatever reason.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  4. Judith Banacky says:

    Thank you for sharing the story of Optimism vs Pessimism. I was able to acquire the retirement funds by overcoming everyone telling me to not risk leaving my 16 yr seniority at a Major Bank. It was indeed a challenge to not give up. In spite of many hurdles I became more successful than even Ihad dreamed of. Unfortunately a lifetime medical problem had to be dealt with and the surgery left me parslized for 5 days. With permanent nerve damage. No longer able to spend my work days traveling but forced into disability. That was 21 yrs ago. Now 70 and post 2008 I am worrying about out living my money. I trusted and never questioned my Broker but have learned that you must always be aware of the Markets and actively. Participate in deciding your investments. It’s deciding who to partner with and requires faith in yourself . Many have said I don’t have enough left “100k”. I just can’t believe That I am forced to accept 3ro 4 %. I am trying to position my self in the Newest compelling Texhnology and build my wealth on those expected “rocket gains . The 2nd is which one warrants paying 2-3k for this information.. Peter Stansberry said yesterday on the Bill Bonner discussion that this type of investment is not suited for someone who only has 100k in the portfolio. Still fighting my instincts.

    • Keith says:

      Dear Judith,

      You’re very welcome and thank you for sharing your story. Your points are very well taken especially when it comes to deciding who to partner with and requiring faith in yourself.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  5. Floyd Nower says:

    At 11:59 I’ll be sleeping….a very rough couple of days. G’night.

    • Keith says:

      I agree. What a wild couple of days in the markets!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  6. Steve Rison says:

    I think you have over-simplified a complex subject, and conflated permabears with pessimism. Investors and traders should not pay much attention to EITHER permabears or permabulls. Neither are correct all the time. Although the long-term general trend of markets is upward, they definitely don’t go up in a straight line, without corrections or bearish periods. You denigrate trying to time markets with a blanket statement claiming that it almost never works. Are you then suggesting that investors and traders should simply ignore market trends and buy and hold positions forever, and never take advantage of trend reversals to sell and preserve profits or bet against the market when it is in a bear phase?

    Almost no one is either a permanent bear or a permanent bull towards the markets, because it doesn’t work very well in practice. Warning your readers not to listen to anyone who says a market or sector is showing signs of topping and heading for a trend reversal to the downside is doing them a disservice. Each reader has to determine their own time horizon and risk tolerance, and they should read a number of points of view, and not rely entirely and only on yours, or the rare permabull.

    • William Dahl says:

      Good morning Steve.

      I am guessing by the nature of your commentary that you have recently joined Total Wealth or are simply not familiar with Keith’s work. He constantly advocates a balanced perspective, proper risk management and an opportunistic assessment of market conditions. Please take a spin through the Total Wealth archives when you have a moment; you’ll find not only his take on many of the issues you bring up, but plenty of proof that serves as the foundation for the Total Wealth approach, too.

      Sincerely,

      William Dahl, Editor

  7. randy a says:

    There will be a day of Reckoning. The current market is based on lies, smoke & mirrors. And it will come crashing down. I just dont know when, For those that have cash it will be the opportunity of a lifetime.

    • Keith says:

      Hello Randy.

      I totally agree but until then the band plays on and, as always, that means investors need to be “in to win” – in both directions.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  8. Ken says:

    This is a great essay. All of your readers should follow it. I believe that there is always
    somewhere to place your money for safety and profit.
    If you can keep you head
    While those about you are losing theirs,
    Then you’ll be taller than they are.
    This is one of my mottos.

    • Keith says:

      Hello Ken.

      Thanks for the kind words and I love your motto so much so that I’d like to borrow it – with due credit naturally.

      In the meantime, I’ll be hunting for the next bull market exactly as you are.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  9. Dave Towson says:

    You make sense to me. Do I invest in the Dow as a market or in certain stocks at this time?

    • Keith says:

      Hello Dave.

      There’s a role for both in your portfolio depending on your individual risk and investment objectives. I break that up in the 50-40-10 portfolio that’s highlighted in our sister publication, the Money Map Report, for example because the broader markets have a very different risk “signature” than individual stocks.

      Regardless of which path you take though, keep in mind that quality matters at the moment. Stick with the Unstoppable Trends, the must-have companies we talk about constantly and prudent risk management.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  10. Victor says:

    The general thesis of the article is true. However, much of the stock market rise recently is because it’s the only game in town while much of the profit is taxpayer or government borrowing dependent. It is not the same as growth supported by a strong capital base,

    • Keith says:

      Very true Victor and an excellent point that we talk about frequently.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  11. Lily Guerra says:

    Hello Keith, thank you for providing me with the recent newsletters on Total Wealth. I was particularly interested in the information you provided regarding “the Black Box”, replacing the now Cell Towers. I wanted to get involved with it but I simply do not know “how to” get involved or begin to purchase stock. I am a beginner, but want to get involved in stock purchasing. Advise me how to get started.
    Thanks!
    Lily

    • Keith says:

      Hi Lily.

      Unfortunately, I can’t tell you how to get started personally because that would constitute individualized advice and that’s against the law. But, what I can tell you is the same thing I tell every beginning investor – establish your base and your core positions first. These are going to be the low risk positions around which you build more opportunistic choices as time goes on. Consider spending some time in the Total Wealth archives to learn more about the tactics and techniques you’ll need. And, of course, continue to read along and comment – that’s how we all learn and part of what makes Total Wealth such a great place to be.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  12. brad says:

    Good informative reading …feel fresh and leaves me invigarated

    • Keith says:

      Hello Brad.

      Your words are music to my ears. Mimi was emphatic that there was opportunity everywhere if you know where to look and have the right mindset to see it when it appears. And I couldn’t agree more strongly!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  13. David Brown says:

    Two many times I have allowed myself to be talked out of staying in the markets by the doom and gloom naysayers just as you have said. I don’t know why I keep falling for the same trap time after time other than as you said, preservation instinct.
    They make what seems like a convincing case why the markets have to be about to collapse and I bail out, even though I have been making good money. I sit on the side lines for a while and watch while I see potential profits go by until I can’t stand it and get back in until I read something else that convinces me that this time it really is the end of the boom cycle.

    • Keith says:

      Hello David.

      We’ve all been there – don’t beat yourself up too badly. The headlines are terrible and self-preservation is a very powerful instinct!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  14. chet travirca says:

    The sky is falling, the sky is falling!
    Chiken Littles are what make the world go around.
    Where would we all be without fear and greed?

    • Keith says:

      Hi Chet.

      …in the poorhouse.

      Fear and greed are two of the most powerful emotions of all and, by implication, two of the most profitable opportunities of all when you can identify them.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  15. Paul Pai says:

    Thank you for the word of wisdom. I learned well at this old age from you. By the way, our 16 year old cat is named Mimi.

    • Keith says:

      Thanks Paul. You are very kind and your words are much appreciated. 16 years old? Wow…that’s a healthy cat!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  16. Maghar Chana says:

    Dear Keith, Thank you a lot. I have noticed the same thing over many many years, the so called Gurus keep
    predicting gloom and doom, but markets keep marching on with periodic correction- rarely as bad as 2008.
    So better keep invested and making money with a dip here and there. In fact those are buying opportunities.
    I know most people may not believe you but these are the wisest pieces of advice. I am taking it to heart.
    Thank you again.
    maghar C.

    • Keith says:

      Hello Maghar.

      You’re welcome! The truth is always hard to rationalize, especially when the alternative seems to compelling. Yet, that’s the nature of the biggest opportunities. They surface when most people cannot see ’em.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  17. Joseph says:

    I want to attend this Las Vegas event.

    What is the price & address or where would I go to get the information? Thanks.

  18. James says:

    Spot on, Keith!

    The five rules of Money Reports are fundamental tenets of stock investing. I believe in them too and it helps me to develop the right stock investment strategy and temperament.

    The stock market is like a Las Vegas casino. You must know what you doing and you must know yourself. I was in Las Vegas two weeks ago with my son’s family. I am not a gambler and I just played the quarter slot machines. I like the wheel of fortune machine. It spins and when the right symbols are aligned, the machine lights up and announces “Wheel of Fortune” press any button to win an award. The lights are flickering and the wheel above your head spins. The award is stacked and the arrow usually stops at a low number with a small reward. It does not matter. I had fun. You go on a high when winning like when your stock is rising to dizzying heights. You are in a state of euphoria and you lose yourself and keep playing until your winnings come to zero, and you must plunk more money into the machine. Bummer! I should have quit while I was ahead. That’s what it’s like in the stock market. It is all question of timing. When to go in and when to quit or pull back.

    Only thing for me, the stock market is a better place to place my bets than Las Vegas. By investing in solid blue chip companies that provide increasing dividends and investing in special situations where you see the “big fat pitch” coming as Dr. Steve Sjuggered describes in Porter Stansberry & Associates reports you will make money in the stock market. Now the “big fat pitch” is in commodities and precious metals. Between Stansberry & Associates and Money Reports, I feel very comfortable investing in the stock market. They provide all the intelligence I need for me to stay in the game.

    One more food for thought: We ended our trip to a visit to San Diego and had dinner with friends of my daughter-in-law’s mom. The husband said he plays the option market and has a account with Interactive Brokers. He was out of my league and I had to keep quiet. He asked philosophically, what is the key to become a successful investor and answered it himself: “start out rich”. Oh boy, he is poking me. All was well though, when he picked up the dinner tab including the drinks.

    • Keith says:

      Hello James and well said.

      I, too, prefer the markets to the casinos because the psychology is readable for lack of a better term. A dealer’s table game isn’t and, even if it were, that would not change the odds the way it does with markets.

      As for dinner, I’ve had a few of those conversations myself and over the years I’ve just learned to enjoy the entertainment rather than the thinking because you cannot have a conversation with a thinker who isn’t thinking. I’m not saying that’s the case here but what you said just prompted a memory.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  19. Homer Tucker says:

    Send info on how to join!

  20. Linda says:

    Keith,
    I keep looking at the 100-year historical U.S. stock chart at Macrotrends noticing that the stock market went down for 17 years beginning in 1965. In December 1965 the Dow Jones was at 7,226.80. On August 1982, it was at 2,187.48. Yes, there were upswings and downswings during those 17 years, but the market never went above 7,226.80. And yes, the long-term trend has been nowhere but up since 1982, but clearly there can be fairly long timeframes when the market trend is down.

    For someone like me who started saving for retirement late in life it is a frightening prospect to think we could be in one of those downward trends. Yes, it will be great to buy on the downward trend if you have 20, 30 or 40 years to wait for your investment to grow, but in 17 years I’ll be 80 years old so I don’t have much time for the money to grow or recover. So I’ve been cautious and have dipped into the market while keeping a lot in cash. And by the way, when I say I just got started saving for retirement, I mean at 63 I only have 100,000 so far, though I plan to work past 70 and will save and invest as much as possible, but like I said, that would still leave me short if we have a long-term downtrend. Any advice for people like me that you can incorporate into a future newsletter would be great.

    I like your newsletter. It offers the best advice out there. Looking forward to your response. A two-year bear is one thing, a 17-year bear is another.
    Linda

  21. Richard Wheeler says:

    Hi Keith,
    Great article. In the opening to this article, it was indicated that you and Alex Green (optimists) debated Peter Schiff and Bert Darkmen(pessimists). As a passport member, I think it would be interesting if you and Michael Lewitt debated each other. As an example, you could ask Passport Members to provide questions that each of you would then answer. Then each of you would respond to the others answers. Could be done live, on video or in writing. I read your articles as well as Michael’s articles. Just a thought.

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