I first started working in the financial markets—as a clerk on an options exchange—in November of 1999.
Four months before the top.
So over the first three formative years of my career, stocks only went down, not up. Not only did they go down, but they went down relentlessly. Demoralizing everyone. Extinguishing all hope.
So, for pretty much my entire career, I have had a bearish bias.
Some folks in the financial media will really beat up on the bears. Don’t beat up on me! It’s not my fault. I was born this way.
If you had started trading from 2000-2003, you would probably be like this, too.
Shaped by Your Experiences
When I was eleven or twelve years old, I once rummaged through my mom’s VHS tapes and found something called What You Are Is Where You Were When. Sounded like a mouthful. So I sat in the basement of our tiny house and watched it.
The video was by a guy named Morris Massey, a business consultant/sociologist who made a living doing seminars and selling tapes about his particular brand of social psychology. His view was that you were pretty much a fully formed person by age 21, and you weren’t changing much after that. But who you were at age 21 was a product of your experiences in early childhood, middle childhood, and your teenage years.
It was based on events that happened to you, but also what was going on in culture and politics and sports and current events. For example, World War II had an indelible impact on “The Greatest Generation,” or for a more contemporary example, take the relationship between Millennials and technology.
Judging from the videos, Morris Massey was a pretty compelling guy. He’d get really animated and even angry in some parts as he told stories about what he called “significant emotional events,” things that have such a profound effect on you that they will literally change the course of your life.
I thought this was pretty fascinating stuff. Even at a young age, I was interested in social psychology. I ended up incorporating a large part of Dr. Massey’s message into my own worldview, especially as it pertained to markets.
Staying in Your Comfort Zone
So what kind of trader you are probably depends on what kind of market you started your career in. One of my bosses at Lehman was an options trader back in the ‘90s (and a terrific human being, too). Not only was he generally bullish, he was a natural optimist.
What he liked best was to just buy naked call options on stuff. Why not? It sure worked in the ‘90s. Volatility was underpriced, and markets only went up. Not so much in the 2000s, when markets went sideways and vol was more challenging. But he kept buying naked upside calls—it was what he knew how to do.
People who began their careers right before the crash of 1987 tend to think that a crash is always just around the corner. I have met a few of those guys.
Guys who got rich trading tech stocks in 1996-1999 are still trading tech stocks. Never mind that the world has moved on and we have since had bull markets in things like steel, railroads, chemicals, and emerging markets. They are still punting around profitless dot-coms.
I’m just a bear. I can’t help it. Actually, I try to help it—I try to step outside of my comfort zone and go long every once in a while. Last year, I bought Tesla and a couple of crappy Internet stocks because they were going up. I made a lot of money on that trade, but I hated every minute of it.
So here I find myself again at the crossroads. The market is breaking out to new highs, and I am underinvested. The reality is that I should probably get with the program and buy stocks, because they could go up for 20 years or more.
As you can see from the chart, the stock market can go up for long periods of time between major bear markets. You can look around and find evidence of froth if you look hard enough—I wrote about Silicon Valley last week—but as far as bubbles go, this is junior varsity stuff. However, if you grew up trading in a crash—and then, eight years later, the market crashed again, you tend to see bubbles wherever you look.
Like I said, it’s not my fault.
I think it’s worth pointing out that it’s been long enough since the financial crisis that you have a new generation of traders who have not yet seen a bear market. And they might not, for a long time. Maybe the next major bear market will come in 2030, when all the codgers who lived through the last one are gone. That is usually how it works.
Cycles of History
Of course, the way to get around ending up as one of Morris Massey’s textbook examples is to really study your history. But that’s laborious. And you can look at old charts, but they don’t tell the whole story.
If you’re 26 years old, how do you really know what it was like in 1999, when the whole country was day-trading tech stocks? You don’t. I’m turning 41 soon, but I really don’t know what it was like in the leveraged buyout (LBO) boom of the late ‘80s. I can read about it, but I will never really understand, not having lived it.
It’s not a coincidence that the Global Financial Crisis happened about 75 years after the Great Depression. Everyone who could have warned us about what was going to happen was dead. Sure, there is plenty written about the Great Depression in the history books. And plenty of people have read it. But it’s not the same as living it.
Direct participation in the stock market is at all-time lows. All-time lows, even with the market at all-time highs! Think about what will happen to the stock market when everyone decides that it’s safe to get back in the pool.
To the moon, Alice.
Jared Dillian
