In A Bear Market, Doun’t Count on Lady Luck

``Lucky fools do not bear the slightest suspicion that they maybe lucky fools-by definition, they do not know that they belong to such a category. They will act as if they deserved the money. Their string of successes will inject them with so much serotonin (or similar substance) that they will fool themselves about their ability to outperform the markets (our hormonal system does not know whether the successes depend on randomness)”- Nassim Nicolas Taleb, Fooled by Randomness

As a saying goes, ``When it walks like a duck, quacks like a duck, it must be a duck!” And so it was.

Everything came so swift and furious that practically swept the floor from the bewildered public. The intensity of the carnage even landed in the FRONT PAGE of national broadsheets!

While it came to a surprise for most, it was not as much for us (except for the degree of decline) since we have seen such risks snowball. We began to play the role of AESOP’s “THE BOY WHO CRIED WOLF!” as early as the last week of July (see July 30 to August 3 edition, “US Mortgage Crisis Contagion: There is NEVER One Cockroach!” and “Technical View on the Phisix: The Path of Least Resistance is Down”), although needed more confirmations until last week, when central banks collectively moved which served as the clincher for us to essentially declare a contrarian cyclical BEAR MARKET call.

Well, based on the news account, these are some of the comments on the latest bloodbath from our industry’s bigwigs, “as if they don’t have value at all…”, “thrown fundamentals out the window”, “they’re getting cold feet”, “difficult to differentiate between a bear market and a deep correction…you should be buying right now because there are values out there. Stocks have come down 20-30 percent from the peak” and “it was a case of “emotion taking over””.

In fairness to these “highly-paid-to-be-bullish” personalities, they might have been quoted out of context. To our experience, media quotes from analysts are usually based on what the media or the reporter DESIRES to present (framing) and NOT exactly the message conveyed by these analysts. We had been an unwitting victim of such circumstance and stands as the reason why we refuse to be a part of these journalistic circuses.

However, in the face of such “frame”, obviously such comments reflect a BIG sense of DENIAL. Now considering their stature, academic backgrounds, network privileges and importantly liberal access to information, research materials and resources, they should KNOW better.

Yet we understand why they “tunnel” or ``neglect of sources of uncertainty outside the plan itself” (NNTaleb-Black Swan) simply because they operate under the economic and financial incentives that buttress the entities which sustains them. Succinctly, our industry makes money when we are bullish.

Self-development author Robert Ringer in his article “Beware of False Perceptions” hits the nail on the head (highlight mine), ``Action is the starting point of all progress, but an accurate perception of reality is the foundation upon which a successful person bases his actions. A false perception of reality leads to false premises, which in turn leads to false assumptions, which in turn leads to false conclusions, which, ultimately, leads to negative results…Which is why it’s incumbent upon you to become adept at distinguishing between reality and illusion. A false perception of reality — regardless of the cause — automatically leads to failure. An accurate perception of reality doesn’t guarantee success, but it’s an excellent first step in the right direction.”

Or we might say their lack of awareness of ignorance, to quote J. Kruger and D. Dunning in “Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Self Inflated Self-Assessments” (highlight mine) ``In short, the same knowledge that underlies the ability to produce correct judgment is also the knowledge that underlies the ability to recognize correct judgment. To lack the former is to be deficient in the latter.”

Let us now delve with the facts; on the account of the global shakedown, the PHISIX was down 12.12% for the LARGEST weekly decline we’ve seen during this cycle. It has been FIVE consecutive weeks since the Philippine benchmark has started to unravel and has lost about 25% from its recent high of 3,820. Year to date from a huge positive return has now turned NEGATIVE down 3.29% as of Friday’s close.

In addition, if the week that ended in Aug 2 was one remarkably huge negative market breadth at 4 decliners for every one advancers; this week’s activities was even more amplified at 5.8 to 1 (29 advancers to 551 decliners)!

In essence, the polemics of whether we are in a correction or BEAR market is all about semantics or definition in the eyes of the observer. In the US, a normal correction is perceived to be at the 10% level, where something beyond it is accounted as the “gray area”, while 20% or more becomes a bear market. So, if we go by their definition then evidently we are in a BEAR Market. Of course, we expect the bulls to argue otherwise.

Yet as last week’s discourse, bear market cycles are typical occurrences within a secular trend. The Phisix can lose 50% to 60% as in the past cycle (1987 and 1989) yet proceed with its secular bullmarket trend. These are the defining features of ANY market cycles. (Caveat: I am not implying that Phisix will fall 50-60%, I am saying that we should NOT dismiss the risk of such outcome, especially under present hostile conditions.)

Nonetheless, to aver that market trades “without fundamentals” or trades in “an emotional state” during a panic selloff represents an entirely biased view. It presumes that investors have gone irrational, ONLY when it comes to a DOWNSIDE.

When the market moved up, or even panicked up, does it mean that our investors rationally priced securities under the conditions of “fundamentals” sans speculation?

How is it that we have “cult stocks” flying over based on fantastic stories but with negative assets or cash flows? Yet the public with the help of media bought into this grand tomfoolery. Now, Newton’s Third Law of Motion comes into play, where ``For every action there is an equal and opposite reaction.” In short, we simply get what we deserve.

As we have always argued, the human mind sets prices in the markets, where values are determined subjectively in combination to one’s perceptions of utility or usefulness, scarcity and time preferences. Thus, the market simply responds to the stimulus that directs such expectations.

Again it pays to HEED the all important lesson by Edwin Lefèvre, a.k.a. Jesse Livermore, in the book Reminiscences of A Stock Operator (highlight mine), ``I NEVER hesitate to tell a man that I am bullish or bearish. But I do not tell people to buy or sell any particular stock. In a bear market all stocks go down and in a bull market they all go up...I speak in a general sense. But the average man doesn’t wish to be told that it is a bull market or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to think.”

Especially with emphasis to our juvenile market, going against the tide is a recipe for portfolio catastrophe.

In our field, what intrinsically matters is the OVERALL APPROACH to one’s portfolio under the prevailing conditions. For instance, at the present turn of events, does one hold on to losses and endure the agony of diminishing price values-to simply HOPE and wait out until the cycle reverts to its secular trend, or does one learn to absorb losses to preserve capital for future undertaking? I have explained to you last week the mathematics of Cutting losses.

A choice is always about a tradeoff on something or some events, known as opportunity cost or economic cost. At present, it looks more likely a choice between capital preservation and the opportunity to lose more than to gain (again I hope I would be wrong).

Getting emotionally attached to the markets can be highly stressful, where conflicting expectations of “not wanting to be left out” and “facing losses” have been today encompassed by the “inability to accept mistakes”. No amount of information will supplant the inherent biases by speculators who will seek everything to justify their losing position regardless of the market’s action. That’s why BEAR MARKETs are described as “descending on a ladder of HOPE”, because hope and illusion and NOT rationality and the acceptance of reality becomes the order of thought.

It is also why HUBRIS or overconfidence exacts a heavy toll on the speculative public who come to believe that their streak of wins becomes an everlasting trait or that the markets function to oblige them without prudential risk assessment.

When it is all left to Lady Luck, in a bear market, then she may have as well turned on them.