Being Bearish Is A Good Way To Lose Money

| November 17, 2011 | 0 Comments

Bears vs. BullsA good friend from my floor trader days loves to bet against the market.  He’s what you’d call a Permabear.  It seems like every time I talk to him he’s predicting a correction or crash… and it’s always just around the corner.

It should come as no surprise… he’s usually wrong.  In fact, he’s lost tens of thousands of dollars using this “strategy”.

Of course, he’s not the only Permabear out there.  I run in to them every now and then.  Typically, these are the same sort of people who are big on conspiracy theories and claims of market manipulation.

Here’s the problem…

Permabears are wrong.

And having a consistent bearish outlook on stocks is a surefire way to lose money. 

Now don’t get me wrong… it’s wise to be cautious.  And there are certainly periods where it’s smart to be a market bear.  But doing so as a regular investing strategy is nothing more than gambling… and chances are you’re going to lose.

Let me explain…

Simply put, the market wants to go up.

First off, good companies – the kind that most investors own – are constantly finding ways to grow their earnings.  Technology improves, supply chains get streamlined, new products are introduced, and so forth.

As long as corporate earnings continue to grow, the stock market will follow in time.  There might be some macro shocks every now and then, but ultimately, a stock’s price is a reflection of a company’s earnings potential. 

And that’s not all…

A significant portion of most people’s retirement money is in stocks.  Pension funds, 401k accounts, IRAs… most of those dollars are allocated to the equities market. 

Think about it… the average worker has part of every paycheck going into their 401k or pension.  Over the long run, retirement investors are investing for growth… and that means stock mutual funds.  That’s billions of dollars every week flowing into the market!

Here’s the bottom line…

The nature of the stock market is to move higher. 

The entire point of a company going public is to make money for their shareholders… and they do that by growing earnings (and the share price).  What’s more, by design, retirement and investment dollars are constantly flowing into stocks.

These two factors mean there’s almost always going to be upward pressure on the market.  Down days, and even down months, occur.  But over the course of years, the general direction of the market is up, up, up.  

Do you want to make a habit of betting against the natural direction of the market?  In other words, unless you enjoy losing money, don’t be a Permabear.

Yours in profit,

Gordon Lewis

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