not, he added, read financial books.Neither does he own stocks, to avoid conflict-of-interest accusations inlawsuits, an occupational hazard for business journalists. Fortunately, DowJones had a generous profit-sharing plan for the greater part of his tenure.Laurel asked him if he had indeed been bearish all through the bull market. “Some people think I’ve been bearish all my life,” he replied.Had he ever had doubts about what he had written or felt embarrassed byhis calls?“How can you be right all the time?” he said, with the magnanimous humility of someone who had been wrong almost all the time. “I’ve never beenin doubt, or I wouldn’t have written it. I can’t say I’ve ever been embarrassedby anything at all.”It is worth noting that a number of writers besides Abelson have beenbearish for decades. But most of them have been relegated to the world ofnewsletters of the hard-money persuasion, the kind sold on late-night television and by direct mail. They require unusual promotion because they havebeen so wrong, and most sensible people ignore them. Howard Ruff, with his1970s-era forecast for $1,000-an-ounce gold, comes to mind. (As we write,gold is at $350, down from $850 in January 1980.)The unusual thing about Abelson’s columns is that they appear at thefront of arguably the most credible financial publication of all. It is as though
Chapter 4 • The Cult of the Bear
121
the American Medical Association or the New England Journal of Medicine toldus to not to go outside because the air pollutants would cause suffocation. AsCarl Hovland and Herbert Kelman have shown, people change their responses much more in response to high-credibility sources than lowcredibility sources.3 As we tried to understand Abelson’s enduringinfluence, our research on cognitive dissonance led us to other insights from social psychology, and to the literature on cults.
Comfort and FearOne similarity is that both cults and financial writing like Abelson’s play to thehuman need for certainty, control, and simplicity in a complicated world. Theprice/earnings ratios and naïve measures of length and breadth cited as reasons for bearishness by Abelson and his sources over a decade are readily available to the technologically unsophisticated investor, and thus provide illusorycomfort. Statistical testing, by contrast, requires knowledge and effort, and occasionally—if not usually—rejecting hypotheses that are disproven by the facts.A further parallel is the reliance on fear. Cults rely on a mix of positiveand negative controls, but to keep followers in line, negative emotions dominate. David Koresh, leader of the Branch Davidians, “was always puttingthings in the negative, always threatening,” one cult member told Flo Conwayand Jim Siegelman, authors of the 1995 book Snapping.4 “He would describehell and start screaming in the most horrible way to show people what it waslike to burn in hell.”A recurring theme in Abelson’s columns is the appeal to fear. Over andover, without regard to changing conditions, he conjures up the horrible catastrophe of 1929, when people jumped out windows and ruination came tothose who speculated. After rallies followed the severe declines of 1973–1974,1987, 1997, and 1998, you would think that common sense would indicate asuspension of calamitous predictions, but no.Psychologists have shown that an emphasis on fear provides a powerfulincentive for change. Driver education films are more effective when theyshow the blood and broken bones of accident victims than when they displaya controlled crash with plastic dummies, according to a well-known study byRonald W. Rogers and C. Ronald Mewborn.5 One has to admire the vividnessAbelson brings to the feared prospect of a market disaster.Vic learned early in his career that people pay a lot more for a negativeforecast than a positive forecast, and they will pay more attention to it. Why?Most people tend to be optimistic, and it is usually justified in the market. If
122 Practical Speculationsomeone predicts disaster, it’s unusual and noteworthy. A more importantquestion is whether the forecaster’s reasoning is logical. In Abelson’s case, wemust ask: What pursuit could have been more pointless than to write a bearishcolumn week in, week out, during the entire run of the greatest bull market inhistory? We like to visit university bookstores to keep abreast of the latestbooks. Often we come across titles so specialized and arcane that we throw upour hands in disbelief that anyone could devote the necessary time to such atopic. Vic, for example, spotted a tome in the Williams College bookstore onthe influence of Oriental coin collectors in nineteenth-century Mexico. The lateSenator William Proxmire entertained America by awarding similarly pointless taxpayer-funded studies the Golden Fleece Award. (One memorable awardwent to the Environmental Protection Agency for spending $1.2 million in1980 to preserve a Trenton, New Jersey, sewer as a historical monument.)As we perused hundreds of Abelson’s columns, we could not help beingreminded of the coin collectors and the Golden Fleece Awards. Abelson’s irrelevance, however, was potentially harmful to any of the hundreds of thousands of Barron’s readers who might actually have traded on his advice—orwho had become so accustomed to seeing him wrong that when the crash didcome, they held tight to their stocks in the belief that Abelson was crying wolfonce more.
Taxonomy of the OeuvreIn Chapters 2 and 3, we noted how investors are manipulated intoleaning the wrong way by what amounts to promotional propaganda about earnings fallacies and untested folklore about tradingpatterns. Tables 4.1 and 4.2 show how the characteristics of propaganda and pseudo-science show up in Abelson’s columns.One of the beauties of the marketplace is that traders who are wrong intheir views tend to be replaced by those who are right. The wrong traders losetheir money. The accurate traders tend to gain more money and support. Asimilar feedback mechanism works in the scientific field. Those who reportcorrect results find that other scientists extend and confirm them. Those whoreport flawed results tend to be discredited. They lose students and funding,and their articles are not accepted for publication.Feedback, in fact, is a fundamental law of nature. Standard biology textscontain many pages devoted to the feedback mechanisms that keep the body’ssystems from getting too far out of order. Feedback is used in almost everyelectronic device. It is, for example, the basis of the modern amplifier.
Chapter 4 • The Cult of the BearTable 4.1Propaganda Device
123
Propaganda Devices and Abelson’s RhetoricExample
Name calling
Calls evidence of stocks offering superior returns “blahblah.”
Glittering generality
“How can you be right all the time?”
Testimonial, bandwagon
Describes his distinguished, invariably bearish sourcesas the most perceptive on Wall Street, “ the smartmoney.”
Testimonial
Quotes analysts with bearish forecasts.
Plain folks
Does not read any financial books.Has no interest in statistics.
Card-stacking
Relies on indicators as diverse as the strength of thedollar to the salaries of nannies in Greenwich, as longas they offer a bearish forecast.
No such self-correcting mechanism exists in the field of writing. It ispossible to be wrong for a long time and still maintain one’s cachet andpower. Indeed, the lone wolf, the chronic iconoclast tends to be even morerare and more newsworthy as others stampede to the other side. Such hasapparently been the case with our hero. His views became very rare, and hissources tended to retire or wither. Yet he survived and thrived, helped, ofcourse, by his brilliance, his creativity, his wide swath of nonfinancialknowledge, his flair, and his rapier wit. When his employees at Barron’smoved on to other careers, they created similar bastions of bearish thoughtin major brokerages and newsletters, where they, too, benefited by standingagainst the tide.In short, Abelson was not subject to the normal self-correcting processthat exists in other fields. That is probably the answer to why beliefs that arenot in accord with profitability or survival often are prevalent in nontrading,non-self-correcting fields.When we started writing our column together, we decided that we wouldtry a different tack. Trading is hard. We knew that our forte was not specifictrading suggestions for individual stocks, but rather principles and forces thataffect markets, and predictions of broad market moves based on a scientifichistorical approach.To overcome our limitations, we decided to trade based on our own research. Rather than recommending what readers should do, we gravitated to alevel where we reported what our own research was and how we would trade
124 Practical SpeculationTable 4.2 Why People Believe Alan Abelson
Reason
Percent of TimeUsed to JustifyBearish Forecast
Problem-solving inadequacies: seeking only examples thatconfirm a hypothesis, slowness to change the hypothesiseven when obviously wrong; finding causality in coincidentrelationships.
100
Appeal to authority.
95
Representativeness (ignoring larger context in which aseemingly unusual event occurs).
90
Hasty generalization; a handful of members (facts) used tojudge the entire group (situation).
85
Post hoc, ergo propter hoc: Correlation mistaken for causation.
85
Use of scientific language but not method.
80
Unprovable assertions.
60
Anecdotes used as evidence.
55
Emotive words and false analogies.
50
Reductio ad absurdem: the slippery slope fallacy (eating icecream will lead you to put on weight; soon you will weigh350 pounds and die of heart disease; therefore ice creamleads to death).
35
Bold but unsupported statements.
30
Ad hominem: redirecting focus from thinking about the ideato thinking about the person holding the idea.
30
Rationalization of failures.
25
Circular reasoning.
5
based on that. This practice gave us the benefit of a self-correcting process inthat if our trades were good we would prosper, and continue, and if our tradeswere bad, we would lose and tend to pull in our horns.In retrospect, we wish we had given ourselves the luxury of staying in theivory tower. On the other hand, the information and knowledge we communicated would have been less focused, less practical, and less falsifiable hadwe not been eating our own cooking.It seems on the surface that Abelson shares some of the characteristics that people talk about when they’re describing unscientificand untested thought. Probably the reason is that he’s not subject to
Chapter 4 • The Cult of the Bear
125
the feedback process. On the other hand, he’s been quite correct in the pastfew years. While we’ve had our share of good trades and bad trades, certainlythe reader who followed Abelson’s advice since early 2000 would have donemuch better than if they had followed ours. We tip our hats to him.That said, we found some insight in Michael Shermer’s Why People BelieveWeird Things: Pseudoscience, Superstition and Other Confusions of Our Time as tohow Abelson, his sources, and his followers were able to maintain erroneousbeliefs for so long despite so much evidence to the contrary.6Using the Weird Things classification as a guide, we systematically analyzed the 525 “Up and Down Wall Street” columns that appeared in Barron’sduring the decade of the 1990s. Table 4.2 provides an estimated breakdownof the use of illogical reasoning.Table 4.3 lists highlights of Abelson’s columns during the 1990s, withnotes on how the forecasts turned out. We chose each quote to give a flavor ofthe anecdotally inspired predictions, the reliance on discredited authorities,and the endless repetition of simplistic, untested indicators. Some quotes areincluded merely to illustrate Abelson’s general opinion of his subject.We will not continue with 1998 and 1999, as the Dow rose 50 percentand the Nasdaq 100 more than tripled, except to mildly observe that Abelsondisapproved of the rise.But we cannot forgo reprinting at length the wildest hodgepodgeof indicators ever to be found in one column. On September 30,1996, Abelson, citing Robert Farrell, “Merrill Lynch’s master sageand our good buddy,” wrote:[T]he dividend yield on the Standard & Poor’s 500 of 2.1 percent is the lowest ofthis century. The value of stocks relative to GDP is the highest ever. The TobinQ Ratio (financial assets/corporate balance-sheet assets) is the highest ever. Andso is the ratio of the S&P 500 to book value. Ditto, the SP 500 price-to-sales ratioof 4.45.The value of stocks relative to house prices is at peak levels. The number ofhours a working stiff must labor to buy the S&P 500 has risen to a record 53.75.Trading volume on the New York Stock Exchange is the most ever. The ratioof Nasdaq to Big Board volume is also at a peak. IPOs, mergers, and stock buybacks are all at record highs. There are an unprecedented number of mutualfunds, and the volume of money pouring into them is twice last year’s peak annual rate. As never before, investors are snapping up the shares of aggressivegrowth funds.The number of people registered to sell stocks and bonds is 527,000, the mostin history and 30 percent more than in 1987. There are a record number—32,000—of candidates to become Chartered Financial Analysts. Seat prices on the NYSE have
Table 4.3 Selections from Alan Abelson’s “Up and Down Wall Street”(1990–1999)Date
Quote
Reality Check
12/31/90
We’re convinced that the bear market willawake from its snooze and come roaring backto life, red in tooth and claw. Serious bearmarkets, like this one, don’t quit until they ’vetotaled the investment landscape (forconfirmation, see 1973–1974).
The Dow, then at 2629,rose 20% in thefollowing year.
1/6/92
We’re also fascinated by the two ominousbelow-the-line black bars of 1973 and 1974, amelancholy span that followed another stockmarket era in which multiples didn’t count andthe only thing that did was growth.
The Dow, then at 3201,rose 3% in 1992. In1973–1974, the marketlost two-thirds of itsvalue, after inflation.
9/28/92
This market ’s headed for a full-fledged fall.The uncertainty of the election, the sorrycondition of the economy, the weakness inthe dollar, the inability of lower rates tofurnish their customary lift, the woeful spiritsof the consumer and the blighted job market,add all of these to stock prices that are stillway overvalued by any reasonable standard—and how can you be anything but bearish?
The Dow was then at3250. Thereafter, itslowest point in the 1990swas 3136 on October 19,1992.
10/12/92
Dick Russell, “ the true disciple of CharlesDow, the latter-day incarnation of WilliamPeter Hamilton, the tireless keeper, defenderand explicator of the Dow Theory,” says abear market began October 5, when the Dowclosed below a magic level, confirming similarbehavior by the Transports months earlier.“This is the really big one,” he told Abelson—the end of the bull move that began in 1974.
The Dow, then at 3136,rose 14% over the nextyear.
5/24/93
That we contemplate the possibility of afurther rally, however, doesn’t mean we’veundergone a midnight conversion. The marketis still horribly overvalued in all the ways thatcount. Froth is everywhere. And the false godof momentum has in his thrall legions oflobotomized followers who have kited scoresof stocks to lunar levels. This will all endbadly, we’ve not the slightest doubt, and theonly question is when. Probably nottomorrow, as we say. But that ’s as far out aswe’ll go.
The Dow, then at 3492,had more than six yearsand 8200 points to gobefore peaking at 11722on January 14, 2000.
126
Table 4.3 ContinuedDate
Quote
Reality Check
10/4/93
You know the sort of blah-blah-blah we mean:those earnest sermons whose text describesthe kind of wonderful returns common stockshave delivered going back to when Noah finallybeached the ark and whose message to theflock is simple: the devil is in the deposits, sohurry to your bank, gather up what pittanceremains in those musty vaults, proceedimmediately to put it to work in a mutual fundand you’ll be rewarded way beyond dreams ofavarice.
A dollar invested in theVanguard 500 Index fundat the end of September1993 would have become$1.72 by April 30, 2002.A dollar invested in a CDat 5% would havebecome $1.43.
11/1/93
Turmoil in Russia, atrocities in Bosnia,murders in Haiti, strife in Somalia, fires inSouthern California, weakness in the bondmarket, higher taxes, you name it—thismarket responds with admirable consistency:Everything’s for the best. And maybe it is.But for some unfathomable reason—therelative handful of stocks that are able tofollow the averages to new high ground or thesteady decline in cash in the hands ofmutual-fund managers (which is the realgauge of investor sentiment these days) orthe swell of over-the-counter trading or thesoggy action in utilities or the rich priceto-book-value multiple, nearly 3.5 times, atwhich the Industrials are selling or the poorexcuse, less than 2.8%, that passes for ayield on the Dow or the flood of equityofferings or the slight itch behind our leftear—we don’t believe it. Just ornery, weguess.
The Dow rose 7.5% overthe next year.
6/27/94
It isn’t that we’re congenitally predisposedtoward a negative view of equities. It ’s merelythat we date this bull market to the end of1974, which suggests it ’s way past its naturalspan.
The bull market hadmore than five years togo. The Dow was then at3636.
11/20/95
Barton Biggs, “in one of his wonderfullyliterate weekly commentaries” for MorganStanley, likens buying technology stockstoday to sitting in on the “last poker gameson the Titanic.”
It was a very long pokergame. The MorganStanley High Tech Index,then at 171, peaked at1162 on March 27, 2000.(continued)
Table 4.3 ContinuedDate
Quote
Reality Check
2/5/96
Felix Zulauf, “our friend and Swiss sage,” saysgold is “ the buy of a lifetime.”
Gold peaked three daysprevious at $415.50, alevel not topped for sixyears and counting. Theprice slid as low as $253on August 25, 1999.
3/18/96
Joe Rosenberg, “investment consigliere ofLoews Corp.” and “a virtual portfolioparagon,” shows a chart of the Dow as proofthat the bull market is in a final climacticstage. “When pressed for how far a declinewill carry, he turns a bit demure and hazardsat least 25%. But he obviously anticipatessomething nastier.”
Five years later, fromJanuary 2000 –September 2001, theDow fell 28%.
3/25/96
Barton Biggs, “a firm believer in regression tothe mean, thinks the pendulum is bound toswing away from financial assets. He envisionsreturns on stocks, for example, averaging a4%-a-year improvement through the rest of thedecade, a steep drop from ’95’s astounding37.5% jump and the hefty 16.7% annualaverage gain over the past five years. He thinksthe big returns will come from Asian equities,emerging markets and nonresidential realestate.”
The average annual gainfor S&P 500 futures was24% for the rest of thedecade.
5/27/96
Andrew Smithers, “a world-class investmentprofessional” bearish on U.S. stocks sinceyear-end 1993, presents “ for the firsttime . . . a coherent reasoned case for asecular bear market.” Smithers, following theindication of the Q ratio, put his own moneyin cash, in safe banks, and advised everyoneto do likewise.
From year-end 1993through year-end 2002, aperiod that included oneof the worst bearmarkets in U.S. history,S&P futures rose 88%,an average annual gain of7%.
8/18/97
(After a 247-point drop in the Dow)Commiserate as we do with the victims—wehaven’t seen so many wailing widows andscreaming orphans since way back in ’87—wefelt the same rush we get from viewing aneclipse of the sun.
After the Octobercrashes in both 1987and 1997, the Dow rose11% through the end ofthe year.
128
Chapter 4 • The Cult of the Bear
129
Table 4.3 ContinuedDate
Quote
Reality Check
10//21/97
Even the most casual observer of theinvestment scene knows that intelligence ismore of a handicap than a help in achievingsuccess on Wall Street. Name any successfulWall Streeter. We rest our case.
Too bizarre to rebut.
11/3/97
[After the worst point drop in the Dow everprompted the closing of financial markets]:What do you call a 550-point drop in a singleday?
Ditto.
A start.And what do you call a 337-point rise on overa billion shares the very next day?A mistake.
reached an all-time pinnacle of $1.45 million. There are more investment clubsactive—22,000—than ever before. And there are 4,700 hedge funds, or comfortably more than one for every stock listed on the Big Board (3,419).Farrell comments that he remembers drawing up similar lists back in 1968,time of the last secular market peak. Trouble developed in the second half whenthe only thing that stopped making record highs was prices.“Similarly,” Bob observes, “we have posted many activity and participationrecords in 1996, and prices have shown limited response. This failure to respondto record demand suggests informed selling and, when combined with record valuation levels, raises doubts about the longevity of the bull market.” As that lastphrase suggests, Bob is a true pundit. A true pundit always says the end is near,but he never says the end is here.
It was not until January 2000—more than three years later—that theDow reached a peak. The average was then at almost exactly double its level of5882 on the day the article on Farrell was published.Abelson has, on rare occasions, quoted sources who do not subscribe tohis views. In the “Up and Down Wall Street” column of June 22, 1998, JohnHussman, a hedge fund manager and University of Michigan professor, explained why price-to-book, dividend yield, and price/earnings multiples hadbeen “worse than useless” as investment guides. Hussman said the P/E ratiohas not been of much help in determining whether the market is too high because of “the hazards inherent in the ratio, notably the volatile nature of earnings” and because “the ratio is often highest when profits are most depressed.”Stocks have at times been extravagantly overvalued and still have performed
130 Practical Speculationwell, he noted, “if earnings have been good, inflation benign, interest ratessubdued, and the technical trends, especially breadth, favorable.” Which hadbeen the case in recent years.But the following week, on June 29, 1998, Abelson was back to citing aBob Farrell statistic du jour: The percentage of the average family’s assets invested in equities had climbed to an unprecedented 38.3 percent. The previous peak was in 1968, when 37.9 percent of financial assets were made up ofstocks. “What ensued, it greatly grieves us to report, was the vicious marketplunge of 1969.”Time after time, Abelson provided forums to market gurus whose forecastshad gone badly awry, often for years. If the seer provided a chart purporting toshow how the market’s latest fever graph ascent resembled that before 1929,1973, 1987, or Japan in 1990, a dozen paragraphs were not out of the question.At the dawn of the twenty-first century, the market’s Cassandra finallyhad his day. The Dow Industrials peaked on January 14 and began a long descent. The technology stocks of the Nasdaq followed soon after in a calamitous, drawn-out crash that was indeed reminiscent of the terrible times of1973–1974. Yet we cannot help but recall the account of the stock marketpanic of April 1864, as told by William Worthington Fowler in his 1870 book,Ten Years in Wall Street:Signs and portents of coming disaster multiplied. . . . When [Anthony W. Morse]entered the regular board that morning, he found nearly every broker eager to sellat heavy concessions, before the call of stocks opened, and the feeling in the streetwas still worse. At half-past eleven o’clock, a broker rose in his seat, and announced the failure of Morse & Co. An appalling stillness, like that which precedes a tornado, followed the words, then the storm burst. . . . The palace ofenchantment, built by a strong and cunning magician of so many golden hopes,passed away like a cloud-pageant. . . .We started to go home early in the afternoon. At the corner of William Streetand Exchange Place, we met S. He was a harmless but very disagreeablelunatic, a Cassandra, who predicted nothing but evil. He had for six weeks beenuttering his doleful prophecies. When he caught sight of us, he began to throw uphis hands and give vent to hollow laughs, which grated very disagreeably on ourkeyed-up nerves. “I told you so! I told you so! Ha, ha, ha!” We tried to shake himoff, but he stuck to us like a leech, hovered about us like an owl, and chuckledwhen he had wrenched out of us the reluctant acknowledgment that we had notyet sold our stocks.7
A sweet triumph, indeed. How we wish Abelson had written novelsinstead. As Shermer pointed out in Weird Science, heresy does not equalcorrectness.
Dow Jones Industrial Average
14,00012,000
9
10,0005
8,000 1
106,000
6
2
4,000
73
2,000
84
01990
1991
1992
1993
1994
1996199820001995199719992001Year
1
(Dow 2629)The bear market will awakefrom its snooze and comeroaring back to life, red intooth and claw. (12/31/90)
7
(Dow 5705)The decline and fall of thetechs is a preview in livingcolor of the decline and fallof the market as a whole. (06/24/96)
2
(Dow 3101)We don’t see the economyrecovering with sufficient vigor andspeed to bail out the current awesomevaluation levels of share prices. (12/30/91)
8
3
(Dow 3250)The market’s headedfor a full-fledged fall. (09/28/92)
(Dow 7442)What do you call a 500-point dropin a single day? A start. And whatdo you call a 337-point rise on overa billion shares the very next day?A mistake. (11/03/97)
9
(Dow 7539, bottom that still stands)With the market still selling at afabulously elevated P/E, the effecton multiples—and the stock market—of a rate cut this time around will bepallid, putrid, or pathetic. (08/31/98)
4
(Dow 3442)We kind of doubt this bull marketstill has six months, let alone two years,of life left. (02/08/93)
5
(Dow 3636)We date this bull market tothe end of 1974, which suggestsit’s way past its natural span. (06/27/94)
6
(Dow tops 5000)Balloons have beenknown to burst. (11/27/95)
Figure 4.1
10 (Dow tops 10000)Even while the markets werelegging it to new highs, theadvance/decline lines weresinking to new lows. The last timeit happened was in 1929. (03/29/99)
Abelson and the Dow, 1989–2001
131
132 Practical SpeculationAbelson should be given due credit for criticizing Wall Street’s cheerleading machine. Moreover, no one would argue that he has upheld the prevailingethical standard of financial journalism by holding no interest in any of thesecurities he writes about. We have a different approach that we believe isequally ethical, or more so: We tell our readers what we are going to buy, andafter our columns are published, we do what we said we would do. That way,we play on the same field as our readers do. We suffer with them—or profitwith them—as the case may be. The prospect of putting one’s chips onthe table tends to concentrate the mind wonderfully and to bring sobriety tothe act of writing.It has become an adage to many on Wall Street that the time to becomebearish on stocks will occur when Alan Abelson finally turns bullish. Wedoubt that this apostasy will occur in our time. Nor can we expect any of hisfollowers to abandon their hero. At this point, they have too much investedin their beliefs, emotionally and financially—and may have lost too muchmoney—to be swayed by reason.Psychologists, looking back on our age, may wish to use the 36-yearpanoply of irrational, dysfunctional belief as a case study to replace the