Why Do Bears Always Wear the Black Hats?

Both optimists and pessimists contribute to our society. The optimist invents the airplane and the pessimist the parachute.

~ Gil Stern

Robert Prechter recently made a lot of waves with his off-the-charts prediction of Dow 1000 in a New York Times article. Prechter is famous (or infamous?) for his extreme predictions, as well as for the fact that some of his market calls have been right on the money:

  • He forecast a bull market in stocks in 1982, but warned investors to get out of the market before the 1987 crash.
  • In July of 2007, he recommended that investors heavily short the S&P 500.
  • In late February of 2009, Prechter advised his subscribers to cover their negative bets in anticipation of a very sharp rally.

There’s no doubt that Mr. Prechter has made some great calls. But like anyone who makes a habit of predicting the capricious gyrations of the financial markets, he’s been wrong a lot too. Although he’s made the odd bullish call, he tends to be quite bearish, often extremely so. But does that make him untrustworthy?

There are some in the investment community who are so averse to Mr. Prechter’s opinions, and to Elliot Wave Theory in general, that anyone who even offers a platform for his views is automatically dismissed as a panic-pusher at best and certifiably insane at worst. Is all of this vitriol justified? Are Prechter and those who deign to discuss his views peddling pessimism, or merely searching for the truth?

Don’t Shoot the Messenger

Having followed financial commentary over the past decade, I’ve noticed that the bull position is usually perceived not only as the default stance, but as the right stance. By right, I mean both morally and factually correct. In reality, bulls are often wrong. Bears are often wrong too. Both are incorrect, but it seems like only bears are painted as both factually and morally wrong – even unpatriotic. They seem to always wear the black hats, while bulls usually wear the white.


Not all bears conjure up the same dismissive grumbling as Robert Prechter, however. Not long before Prechter’s pronouncement, Richard Russell, the enduring editor of the Dow Theory Letters, advised his subscribers to Sell Everything Liquid. While many were skeptical of his predictions, he garnered a little less outright hostility than Prechter is accustomed to receiving. Perhaps his longevity has earned him a pass.

Still, most people with bearish views are usually treated like the Tae Kwon Dodos in the movie Ice Age who go around intoning “Doom on you!”. Perhaps this cynicism is deserved in some cases. Some of Mr. Prechter’s predictions are a little far-fetched, but that doesn’t mean he should be discounted completely.

Why the Black Hats?

I guess it sort of makes sense that bears would be viewed more negatively because they are, by definition, well . . . negative. Let’s face it. If given a choice between receiving good news or bad news, most of us would choose good news. It’s easier. It means we don’t have to worry. We don’t have to prepare. We don’t have to do anything. All is well.

But what if all isn’t well? Who is providing the greater service – the advisor who makes you feel good even though tough times are ahead, or the one who tells you to prepare for trouble on the horizon? Back in 2007, Meredith Whitney received death threats as well as abusive emails and phone calls after she downgraded Citigroup. As we all know now, she was 100% correct. Ironically, whether they’re right or not, it’s the analysts who lean bearish who are often villainized. But why?

There are a few possible reasons:

  1. Most investors, especially retail investors, are long-only: The average investor has neither the time nor the expertise to use the more sophisticated strategies (options, shorting, inverse ETFs) necessary to profit from a market downturn. An upward-trending market is better for the masses.
  2. The financial services industry sells bull markets: Assets under management refers to the amount of money a financial adviser or firm controls for clients. Most financial services companies earn a percentage of the assets they manage whether those assets appreciate in value or not. It’s the gift that keeps on giving. Your adviser will almost always discourage you from selling because he/she makes money from your money. But if you never sell, you are perpetually long and you can lose a lot of money in a secular bear market.
  3. Bad new isn’t fun: As mentioned above, rocky markets imply a rocky economy, which often means more worry and work for all of us.

Markets and economies are supposed to be bidirectional. While bears can sometimes lean too far to the negative side of the boat, that doesn’t necessarily mean they are deliberately trying to tip it over. Sometimes the bearish perspective is the right one, even if it’s not the easiest.

Why Negative Isn’t Always Bad

A balanced, realistic life involves ups and downs. So does a balanced market, economy, or portfolio. We can ignore, contort, or delay reality for awhile, but nature and economics will command balance eventually. It’s long been my contention that one of the major problems with our modern culture, markets and economy is the failure to fail. Really, it’s not so bad. In truth, it can be really good.

Forest fires bring both destruction and rebirth. Personal failure brings both discouragement and growth. Bad times render the good times that much sweeter. And sometimes, hard times are reality. Ignoring that reality can bring on a set of negative consequences that make the organic hard times look like a walk in the park. I think that’s where we are right now.

I would love to be more bullish, but I fear that it’s our failure to fail that’s causing us to epically fail, as my sons would say. Negative isn’t always bad. There’s nothing wrong with a disagreement that clears the air. Nor is there anything terribly threatening about a recession that clears the economic deadwood.

But we currently live in a society where the acknowledgment of failure is unacceptable. There are banks that should rightfully be out of business paying millions in bonuses. There are government-supported auto companies announcing amazing percentage gains in sales – mind you, a huge gain is pretty easy to attain when you were in bankruptcy during the previous year’s comparison period. Taxpayers are footing the bill for this fake success. Government deficits and debt are ballooning globally as a result.

If the past couple of years have taught us anything, it’s that fake success is fleeting. Real failure, while unpleasant, eventually leads to real success. We may not always like what the bears have to say, but we owe it to ourselves to hear them out. Handling negative financial developments in a timely manner is better than pretending they don’t exist, allowing them to multiply, and paying an exponentially higher price to clean them up later. Maybe if we gave the bears a break and let them wear the white hats once in a while we wouldn’t be in this mess.

Do you think the bears get a bum rap, or is it really wrong to be negative on the markets and economy?


Written by Kim Petch

13 Responses to Why Do Bears Always Wear the Black Hats?

  1. Every cloud has a silver lining. If the markets drop, it also means it will be a good time to load up on cheap stocks. You’ll do better over the long run, unless you believe that the markets will go to 0 😉

    • True. The trick is being able to figure out how cheap to let them get before you buy. The other thing to remember is that if you are long always and long only, you won’t have cash on hand to pick up those values. Thanks for stopping by! 🙂

  2. I think your analysis is right on the money. The fact that that western civilization–especially here in North America–is so patentedly optimistic is the most basic reason why we need to listen to what Prechter and others of his opinion have to say. There are more than a few of them out there–Marc Faber is predicting far worse to anyone who will listen.

    Here’s my take on the optimist/pessimist thing: A true optimist is a person who has a correct view of circumstances–whether GOOD OR BAD–and reacts to them with positive action. A blind optimist–the more common type–is just that, blind. Any news is good news, which has nothing to do with reality.

    A true pessimist is one who believes nothing will ever work, and is usually handcuffed by inaction resulting from his convictions. He reacts no better on the downside than on the upside. People who see bad events coming down the pike and take action to confront them aren’t pessimists–they’re actually true optimists!

    I think most people are either blind optimists or true pessimists, which is probably why more of us aren’t rich!

    • I like your distinction between a true optimist and a blind optimist. I’m just looking for the truth, but I’m finding that it’s not always easy to find. Thanks for your comments! 🙂

  3. Negative isn’t always bad, but for some reason a lot of people take it personally when people forecast bad tidings for the economy. It’s not as if there are opportunities to be made in bad times. I was called a chicken little back in January 2008 when I was telling anybody who would listen to me that I pulled all my money out of the stock market because the housing market was a ticking time bomb that would leave lots of collateral damage. A lot of them thought I was crazy trying to time the market. It turns out I was crazy like a fox.

    I pulled out again this April because I see more big problems ahead associated with, among a host of other bad things, the run-out of last year’s stimulus and the 2011 increase in taxes resulting from the end of the Bush tax cuts.

    (And yes, folks, I realize conventional wisdom says trying to time the market is foolish. But the market has dropped almost 10% since I bailed, so I feel somewhat vindicated by my decision.)


    Len Penzo dot Com

    • I can certainly understand how jumping in and out of the market without a plan might not be a great idea, but I’ve never been able to buy into the “timing the market is foolish” doctrine.

      It sounds like you’re 2 for 2 so far on your timing. Send me an email or something when you think we’re near a bottom, would ya’? I’ll want to sell my inverse ETF! 😉

  4. Interesting topic.

    I value accuracy, or more importantly a good-faith effort to give a true, genuine opinion, whether positive or negative.

    While I like to have a positive approach to things, I also think realism needs to be at the foundation of decisions – especially about money.

    When someone is giving advice on what to do with your money, it’s fascinating to me how some folks have an aversion to hearing negative assessments about the market, yet concurrently gravitate toward the positive.

    Whether bull or bear, I don’t care. Give me reality!

    • Let’s hear it for reality! I’m with you on that. We have access to so many opinions today with the proliferation of media that it’s become a bit of a sport to try and figure out who’s telling the truth, who’s pushing their own agenda, and who is honestly mistaken. That’s why I like writing this blog. I can offer information from various sources and my only agenda is the truth. Still, I can’t promise that I won’t occasionally be honestly mistaken. 😉

  5. I have a different take on this. There really is something wrong about being pessimistic. We all need optimism to have the courage to take on the world. We should be wishing for good things.

    But those who say that stocks are at times a bad investment choice are NOT necessarily pessimists! I have had a zero stock allocation going back to the Summer of 1996 and I have never had a single pessimistic thought re stocks pass through my mind. I looked at the prices at which stocks were selling during that time, saw that it was too high, and naturally elected to take a pass. I am OPTIMISTIC that stocks will someday be available again at good prices and I can wait for that.

    We don’t call people who buy cars or computers or groceries at good prices “pessimists.” We need to get out of the habit of thinking in this mixed-up way re stocks. The key is getting out the word to people that long-term stock returns are highly predictable and depend on price. The Stock-Selling Industry does not want us to know this, for obvious reasons. We NEED to know it. We should all help out friends and neighbors and co-workers see through the sales pitches and learn the realities of stock investing. Stocks are a good deal when priced reasonably and not otherwise, just like everything else.


    • I like to be optimistic too. If I have all of the facts, I know I’ll be able to make a reasonably good choice. Still, different people can look at the same facts and come to different conclusions about how they should act. You look at the value of the overall market and conclude that stocks are overpriced, so you don’t buy. A good active trader might look at various technical signals and make money trading in and out of the market. Neither person is wrong unless they consistently lose money on their investment choices.

      Thanks for your comment!

  6. “Real failure, while unpleasant, eventually leads to real success.”

    I think we ignore this all too often. There are lessons that we fail to learn because we fail to fail. These lessons often do lead to ultimate success. Capitalism allows failure and success, and that’s one reason why capitalism produces more millionaires that any other type of economy.

    • Without failure, we don’t really have a capitalist system. As such, I’m not sure what the system we have now is called, but it doesn’t look like capitalism to me.

      Thanks for your insights.

  7. This is a very interesting topic.
    I’m a realist, and that means that things are not always a bowl full of cherries. I agree with Squirrellers. Without the negative, the postive might be all over the road, so to speak.

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