WALL STREET GIBBERISH, 2008 SECOND QUARTER NEWSLETTER

This time the gibberish may not be as “bad” or as potentially harmful to investment returns as those I typically write about, but given the amount of media coverage of the “official” declaration of a bear market, it is worth some discussion. In what sense is it official? The stem of that word indicates that is should come from some office that has the authorization to make the declaration. For example, an official document, such as a passport, usually is one that has been issued by a government office. I am unaware of any organization that has the authority to declare that we are in a bull or a bear market.

The above is pretty much nit-picking semantics, so it is not really important. My main objection to considering the declaration of a bear market once a major index or two has dropped 20% is the idea there is a certain percentage drop that defines a bear market. Similarly, once the indices rise 20% from their lows, the same “authorities” will say we are now in a bull market. The Perspective section shows, using actual data of all things, that there is nothing special about a 20% when it comes to getting an idea if the market is likely to be weak in the near future. Drops of 10% or 15% would serve as well.

Another way of looking at this is to consider two cases. In one a major index, such as the S&P 500, falls about 19% from its high and then recovers to make new highs. According to the talking heads and story writers, we were never in a bear market. In the second case, the index drops 21% and then recovers. That was a bear market if we are to believe the popular media. Were the two cases really very different as would be implied by one being a bear market and the other not?

Moreover, the notion of an “official” bear (or bull for that matter) market can be harmful to one’s investment returns if it is taken seriously. The danger is the implication that until we are in a bear market, we don’t need to worry about the risks of owning stocks. To me, that is the sort of nonsense spouted by the “buy and hope” crowd. As long as it is not a bear market, no need to worry, just hold onto your stock investments. Then once the bear market is declared, they will tell you it is too late to sell because stocks always go up in the long run and nobody can consistently pick the tops and bottoms of the market. The last part is true but irrelevant. Once a meaningful trend down has been identified, which I do using quantitative models, the risks of stock ownership have gotten high relative to the potential rewards. The method is far from perfect, but over time it works a lot better than following the gibberish.

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