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November 19, 1998

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Subject: PermaBears
Author: loverbear

I confess to having bear tendencies. But I think the word populist best explains my trading philosophy. I like to watch and see what real people are doing and base my trades accordingly. Bears are not bad people, and they are right often enough to make ignoring them a very costly exercise at least twice every year. Lately, though, that I have been bothered by the ravings of the PermaBears, the professional black- lining-to-every-silver-cloud guys.

We are not in a recession, and we are not heading for one. Our economy is still strong. The basic props of the market: Manufacturing, Construction, and Services, are humming along. Certain areas like big banks and big oil are not going to do well. That is a given. The rest of our economy will turn in good profits this year. Some will be surprisingly strong. Despite a decline in recent months, 1998 may still go down as the best year ever for Construction. That is important. The infrastructure we build today will be the launching pad for tomorrow's economy. It also bespeaks a quiet confidence in the future. The figures coming out of construction are the echos of millions of decisions being made by millions of Americans to invest in the future. I'm a populist. I hear those echos.

  "We are not in a recession, and we are not heading for one. Our economy is still strong."

What the bears don't talk about is the fact that, while quarterly profits were not as good as a year ago for some of the Big Caps, profits still remain good for the majority. Some Big Caps are not growing their profits. The bears are right to look at this. But some Big Caps are doing very well. It is these companies that just don't show up on the Bears' radars, or get much mention in their columns.

What I sense is that the Boomers are still going to drive the stocks up. Boomers are still working, still earning at their life-time peaks, still at that enviable period in their lives where most of their big bills are paid, and still have to do something with the excess. Many pulled money from the market in August and September. But in December, when they discover that the market has risen 15 percent, and their money markets are only paying 5 percent, they are going to rush back into the market. The boomers are coming and they will be buying.

It is this 'Boomer' factor for which the PermaBears never seem to be able to account. One such PermaBear recently admitted that the market just has not been reacting normally since 1982. That's 16 years folks. Back up and calculate about when the Boomers were just beginning to enter the market. Hmmm. When I do my calculations I get 1982. The PermaBear mentioned has been unable, or has refused to factor the Boomers into his thinking. He is not alone.

  "Since 'exuberance' and 'speculation' exist, and have existed in the market for the past 16 years, how do you, as a bear, account for and include exuberance and speculation in your trading strategies?"

Ask a PermaBear to explain why people invest in AOL and Amazon, companies that have extremely high P/E's, and you get 'irrational exuberance' and 'speculation' from him. And even if you accept those glossed over terms as real explanations you owe it to yourself to ask the follow-up question.

"Since 'exuberance' and 'speculation' exist, and have existed in the market for the past 16 years, how do you, as a bear, account for and include exuberance and speculation in your trading strategies?"

The answer from the PermaBears is that they don't.

Try to imagine that you are new to an area, and you are planning to build a house. You ask an experienced contractor if there is a problem with ice in the winter. His reply is that on occasion, in each of the past 16 winters, there have been problems with ice build-up on roofs. You then ask him what his strategies are to handle this factor are. He gives a blank look then admits that for the past 16 years he has had no strategy whatsoever. You'd still want him to build your house, right? The PermaBears are like bad contractors who just refuse to deal with known phenomena. And they suffer from the 'Goldilocks Complex'. They have to have everything just right before they will enter a market...not to hot, not too cold, but everything just perfect. Yet many PermaBears have wide and attentive audiences.

Not every investment in internet stocks is going to be profitable. Many will never make a good return. But the Motley Fools have it right. The internet is the future. You can avoid internet stocks, or you can invest. That is the choice you face. Even if, like me, you decide to invest, you still face a challenge. Finding a fair and accurate way to value the internet stocks is the greatest challenge most investors will ever face.

I'm a populist. The market is about people. People are messy and unpredictable. Many many people like AOL's and Amazon's services. They believe in these companies' futures, and so they buy into those futures. That is not irrational. It is a very real and positive human factor in the market. Belief in the future is the heart of capitalism. The PermaBears just don't get it.

Loverbear


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