Bulls always win

With the ongoing high unemployment and signs of building inflationary pressures, the bears are starting to come out with predictions of economic catastrophe.

There is a school of thought which argues that the entire recovery from the recession of 2008-2009 was a fabrication of the easy Fed policy and subsequent injection of additional easing through QE2, and that now that those drugs have run their course, the hangover is going to be horrendous.

Such a view is on display in a recent Barron's article by Randall Forsyth, "Anticipating the Removal of the Punchbowl," in which the author cites a quotation from Cantor Fitzgerald's chief economist who asks, "So, what happens when they take the addict off the dope?" The "dope" in this case is quantitative easing, or as the article puts it: "the Federal Reserve's $600 billion Treasury securities purchase scheme to pump liquidity into the financial system." He implies throughout the article that the rise in prices of stocks and other "risk assets" are the product of continual "spiking the punch bowl" by the Fed, and cites frequent bear Jeremy Grantham who advises, "Sell in May and go away for 41 months." Forsyth notes that while Grantham "freely admits to being early many times with his calls since the early 1970s, he notes they have eventually worked out."

Another bear recently pointing out how his pessimistic market predictions have worked out is Doug Kass, who recently wrote an article entitled "False Sense of Security," taking the bulls to task for their optimism in 2008 and saying they are making the same mistake again. He declares that the problems of today are worse than the predecessors, and says that "At best subpar growth looms on the domestic economy's horizon; at worst, a double-dip is still possible."

While bears such as Grantham and Kass can point to previous recessions as evidence that they were right, we would argue that in the long run, the bears are always wrong. Anyone who looks back over the past hundred years would have to admit that being a long-term bear would have been a huge loss.

Therefore, the bears are of necessity short-term focused: they try to predict a short-term downturn in order to avoid it, and then correctly predict the moment to get back in. We would argue that this is a fool's errand, and that saying "I've been early a lot but I'm always rewarded by a recession in the end" is a recipe for missing the real opportunity to participate in the growth that takes place while you are waiting for a disaster.

Contrary to the straw man argument that many pessimists will use in response to such criticism of their view, our long-term optimism does not mean being a blind pollyanna and investing in just any company (or even all companies via an index fund) forever. We believe in researching investments very carefully and looking for well-run companies positioned in front of exceptional fields of growth. Even in periods of "sub-par economic growth" for the economy as a whole, there will be innovative companies that are creating or profiting from major paradigm changes, and we believe in owning these companies through economic cycles and selling them when business conditions change, not when the unpredictable stock market conditions change.

We have pointed out that Thomas Rowe Price, from whom our investment process is descended, did not believe in trying to time cycles, and his long-term record speaks for itself. We would also point out that our process has led to significant outperformance versus the broader market over the past four years, even through one of the most punishing bear markets in American history.

In short, we are bullish on capitalism over the long term, and believe that as long as free enterprise is still allowed, bearishness is short-sighted. This does not mean that investors should not change their strategy based on the prevailing regulatory, monetary, and fiscal environment that they see developing -- that would be foolish, and we have written about the indicators investors should look for and changes they should make in a series of articles, such as this one, this one and this one.

We would caution investors to fight the urge to run under a rock every time the bears begin predicting disaster. This is not a game in which the bulls win some and the bears win some. Over the long run, the bulls always win.