Optimists Survive By Eating Bears

Today (9/10/15) David Tepper came on CNBC for an hour. The whole discussion is worth watching but one thing he said is missed time and time again by many investors.

“I’m not real comfortable being short stocks because there’s a bias for stocks to go up over time”-Tepper

Tepper has been putting up 25-30% returns for over 20-Years with billions under management. He is one of the best traders in history, great at sizing up risk reward, security selection, and timing….and yet he says “I’m not real comfortable being short stocks because there’s a bias for stocks to go up over time.”

One of the sub-segments of the investment/econ space that I enjoy are the “end of the world as we know it” genre. They are mainly published at market bottoms while the super bullish books are published at market tops (remember Dow 40,000?) but we also see a lot of them mid cycle as well. For whatever reason doom and gloom sells very well. The short argument always sounds like the intelligent argument. To make it worse there is always a lot of data that shows real reasons to be worried. Look at any of the books in the picture below and they are filled with data and charts showing impending doom. If you look at the publishing dates however they either missed the crash or just got the entire thesis wrong. (BTW I recently moved and have not unfinished packing or I could have shown a stack four feet high of end of the world books. For whatever reason I cannot resist the urge when I am in a used bookstore).

The end of the world

The end of the world

What the perma-bears get wrong is that over time civilization has indeed improved its lot in life. Yes, there are downturns but more often than not stocks go UP and not down. If someone as smart as Tepper is wary of shorting then what does that say about what you should be doing?

Looking at US assets over time using data from the Credit Suisse Global Investment Returns Yearbook we can see that stocks go up….a lot….over time. Even after taking into account inflation you would have 1,396 times your money from 1900-2014. Bonds and bills are less explosive but even there they go up over time.

Cumulative Real Returns USA

Cumulative Real Returns USA

Over the past 115 years you would have been fighting a 6.5% annual upwards drift by shorting stocks. That means that you are fighting a 0.54% hurdle each month. And of course that doesn’t even include any borrowing costs, commissions, or taxes.

Annualized Real Returns USA

Annualized Real Returns USA

Now all of this is not to say that we don’t short because we do. We have had success going long and short across asset classes to include stocks. What I am saying is that you need to have a really good reason to fight long term trends in markets. If you can’t figure out why you have an edge on any given trade then you are probably better off not doing it. Oh and in case you are wondering “stocks are overvalued” or “Because the Fed” are not sufficient answers.

If you want more info on the long term bias of stocks to go higher, or just want to get a lot smarter, pick up a copy of the book “Triumph of the Optimists” by Dimson, Marsh, and Staunton.

Happy Trading,

Dave@TheMacroTrader.com

http://TheMacroTrader.com

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