Why permabears seem right even when they're wrong 🐻

For many, it's the same financial outcome regardless of whether the bears are right or wrong 🤑

An AI-generated image of bears and money.

Why are the permabears (i.e., financial market pundits who spend most of their time being bearish) embraced by so many even though they spend most of their time being wrong?

It’s a complicated question we in the financial blogosphere have been wrestling with for years. And many of my peers have advanced some good answers. More here and here.

I’ve been thinking about this question more and more in recent weeks. And in my reflection, I’ve noticed a pattern in how retail investors rationalize their financial performance after embracing an incorrect bearish view. It goes something like this: “Well, at least I didn’t lose money.“

Let me explain what I think is happening here.

There’s a big difference between shorting the market and taking risk off 🤔

If you’re bullish, you make money when stocks go up (i.e., you’re long the market). And if you’re bearish, you make money when stocks go down (i.e., you’re short the market). Right?

While this framework makes sense in the theoretical and professional worlds of finance, it’s actually not how all investors act with their finances.

In my conversations over the years with retail investors — many of whom are novices (not that there’s anything wrong with that) — most don’t swap their long positions for short positions when they turn bearish. Rather, they tend to embrace more of a risk-on versus risk-off approach.

What’s the difference?