How Did these Guys Miss it So Badly? – Follow Up

Yesterday’s post where I ragged on just about everyone was heavily commented on both here on on Seeking Alpha. I realized that I left out an important (to me) point that probably should have gone near the part where I picked on Larry Kudlow, Art Laffer and Brian Westbury.

There seems to be a failure to acknowledge that bear markets are a normal part of the stock market cycle. This failure is common to many people and is beyond me. The stock market goes up most of the time but sometimes it goes down, simple as that. This will repeat over and over because it is normal and just how things work.

As 2007 was winding down the bull market was about five years old. The risk of a bear market is greater after a five year bull market. This conclusion can be drawn without any awareness of the current condition. That would not be sufficient to declare that a bear market was here but in terms of risks, the risk of a decline would be greater after a run up that lasted for five years.

In the early days of this blog long before the bear market and financial crisis started I wrote often about mentally preparing for a bear market. I wrote about how they almost always start. They start slowly and most people do not recognize them for what they are and deny a bear has started which ties in with the perma-bulls somehow forgetting how normal bear markets are to the stock market cycle.

Then sure enough the bear market started slowly back in Q4 2007 and of course most people denied it. The textbook start (I chose the word textbook there because I relied on history to be my guide) to this bear made it, IMO, easier to spot.

If you think about bear markets ahead of time and realize they are simply a part of every cycle then you are less likely to react with emotion, you are more likely to have a plan in place for defense (if that is appropriate for you to do). Then when the time comes you only need to be disciplined enough to execute the plan.

Maybe we can blame the failure of some to even acknowledge ahead of time that bear markets are possible (not even talking about a reasonable prediction, just the acknowledgment that a bear will come one day) on various biases, conflicts and constraints but none of that needs to apply to you. If we are to conclude that your fund manager, for whatever reason, will not protect your assets then you need to take it upon yourself. The next bear market, whenever it comes, will start very similarly to this one and the ones before it.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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