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The Science of Hitting
The Science of Hitting
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The Life of a Permabear

Some thoughts from an article about SocGen strategist Albert Edwards

January 21, 2019 | About:

A recent article in The Economist featuring Société Générale (XPAR:GLE) global strategist Albert Edwards caught my attention. Here are a few of the lines that stood out to me (as always, I’m reading and thinking about this through the eyes of an investor trying to make intelligent long-term decisions in an uncertain world). I’ll list them here and include my thoughts afterward.

“In uncertain times Albert Edwards is someone you can rely on. For more than two decades, latterly as global strategist at Société Générale, he has been a steadfast prophet of gloom.”

“The core message has not changed much, but neither has Mr. Edwards’ popularity. With unfailing regularity he is ranked number one in his category in surveys of global investors. He admits to getting it wrong a lot. But his talent for imagining the worst is valuable.”

“Mr. Edwards is often dismissed as a perma-bear. It is true that he does not update his views very often… They all believe that in the end they will be proved right; the twists and turns in the meantime are of minor importance.”

“Now that QE is being withdrawn, it is no surprise markets are jumpy. Recessions of recent vintage began when a fairly modest tightening in monetary policy led to a blow-up in finance, he argues. High levels of corporate debt in America mean the next one will be deep.”

Again, I think it’s worth reiterating that I’m looking at this from the perspective of an individual hoping to make intelligent long-term investment decisions (presumably the same way you’re looking at it). The question for me is clear: is there a way to utilize this information to improve my decision-making and increase my odds of investment success over the long run?

I think this article captures how far off the mark the work of a “global strategist” is from what I’m trying to achieve. Through that lens, it hardly seems a permabear like Edwards is “someone you can rely on” – or should’ve relied on – over the past 20-plus years (since he joined Dresdner Kleinwort in 1988, the S&P 500 has seen a roughly 10-fold increase, before dividends). His thoughts may be interesting, but it's hard to see how they can help you towards your long-term goals as an investor.

As with most of these prognosticators, a quick internet search will reveal they’ve made similarly predictions to the one they’re making today for a long time. In the case of Edwards, here are a few examples from 2010 (“Albert Edwards: S&P 500 To Crash To 450 Points”), 2011 (“S&P 500 Crash In Our Future, Says Albert Edwards”), 2012 (“The S&P 500 Is On The Verge Of The Ultimate Death Cross”), 2013 (“Warning! Stocks to Crash, Gold to Top $10,000: Albert Edwards”), 2014 (“S&P 500 Running On Fumes: Albert Edwards”), 2015 (“Get Ready To Relive The 2008 Crisis: Albert Edwards”) and 2016 (“S&P 500 Could Plunge 75%: Albert Edwards”). These type of predictions have continued since then, but I think that’s enough to make the point clear. When equity markets inevitably go through a major rough patch (kind of like the one we experienced in recent months), some in the financial media will proclaim Edwards and others like him have been proven right. I’ll leave it to the reader to determine whether or not that’s an accurate conclusion.

But as noted in The Economist article, consistently being incorrect doesn’t appear to be an issue (“he admits to getting it wrong a lot… [but] the core message has not changed much”). To me, that speaks volumes – and I guess that works (or is just an issue of “minor importance”) if you’re a strategist, but consistently being wrong in your portfolio as an investor has consequences. Over the long run, it seems clear that following the advice of prognosticators will be detrimental to your financial health. Simply put, their professed ability to read the tea leaves and time the market would be more convincing if it wasn’t accompanied by such a spotty track record (to put it kindly).

Unfortunately, it seems many individuals simply can’t resist the siren call of a permabear. So many of the discussions I have with clients, friends and family (as it relates to investing) seem to revolve around the idea of getting out before the next correction or worrying about macro stuff like Fed policy. It’s interesting because these are the kind of topics I basically never think about as an investor. That’s not to say QE (as an example) is unimportant. Instead, it’s a realization that trying to predict major developments (whether macro or political) and their subsequent impact on stock prices is basically impossible (Trump's victory in the 2016 U.S. Presidential Election and the subsequent climb by the S&P 500 is a good example). Again, look no further than the past predictions of Edwards, someone who you can safely say is intelligent about the subject matter at hand.

Despite these shortcomings, Edwards and others like him can sleep well knowing people still want their predictions. Even when wildly off course, it seems there will always be an audience for a “steadfast prophet of gloom.” Personally, I think his followers would be better off if they instead considered the words of Warren Buffett (Trades, Portfolio), who said the following when he was asked about cracks in the U.S. economy and the risk of a recession after a nine-year bull market run:

“America has been on a 242-year run, it just gets interrupted and will get interrupted from time to time. I don’t have the faintest idea when it will happen, and whether it’s nine years old or nine months old, it can still happen anytime. I’m not worried about the long-term future of America and I don’t worry about the short-term. That makes me a happy guy.”

If you can position your portfolio such that you're able to live with volatility and uncertainty and weather the inevitable interruptions that will occur in the short run, you can disregard the permabears. Not only is that a good idea if you want to be happy, but it will also be a major step in the right direction towards long-term investment success.

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About the author:

The Science of Hitting
I'm a value investor with a long-term focus. My goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio - a handful of equities account for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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Comments

Praveen Chawla
Praveen Chawla premium member - 8 months ago

I guess people love to get scared, sit around the camp fire listening to ghost stories. Most of these perma-bears probably got one or two of their predictions right, at the begining of their careers, built their reputations and got set for a long lucrative career as macro strategists.

I guess the same is true for perma-bulls ...

The Science of Hitting
The Science of Hitting - 8 months ago    Report SPAM

Praveen - Good point. At least the perma-bulls are on the right side of the table (the equivalent of being the house for a large number of spins on the roulette wheel). Thanks for the comment!

ncage
Ncage - 8 months ago    Report SPAM
So i think your article doesn't tell the whole story. I do not agree with the strategy of always being fully invested and just using DCA. Your setting yourself up for meager results.

You ever heard Buffet's saying that when its raining gold reach for a bucket rather than a thimble? Why do you think Buffet is now sitting on a record amount of cash at this time?

That is not saying if you find a sweet deal on a great company and the market is overpriced that you shouldn't pounce. It just means as the market goes up you will find less of those deals. What i think one should do think about reallocation. As the market goes up and becomes more overpriced then sway more towards liquid assets and and the market becomes cheap then go more towards equities. IMO the % is the secret sauce and is going to be different for each person. There are so many factors: Age, Micro/Macro economic factors, Risk Tolerance, ect.... You could go the Ray Dalio (Trades, Portfolio) route (all weather portfolio) and allocation always at a certain % but IMO that isn't optimal.

There are many indicators to follow that can help: Buffet Indicator, Shiller PE, ect. While these indicators don't tell you when the market will crash they do tell you the general direction the market is heading to (over/under priced).

I'll use today as an example. The market is way overpriced. Could we see new highs? Definitely. The S&P could go to 3000 or a little above. But if it does and you gain 12% on your portfolio but then the market crashes 40-50%. Where are you? Then you only have your monthly contributions to invest in the market.

You always have to think about the potential to the upside vs the potential to the downside and allocate your portfolio accordingly.

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