Hope is a Four Letter Word

“The hope balloon is losing air. It points to how on-edge everybody is and how much emotionalism is still involved.”
-Henry Herrmann, chief executive at Waddell & Reed Financial


The above is only one of several oddities in the Abreast of the Market column in this morning’s WSJ. I am compelled to comment upon this, as it reflects a classic money losing strategy endemic to fund managers and traders.

The subhed of the article is Tepid Upturns Haven’t Stopped the Slide; ‘Hard to Make a Cheery Story’ and therein lies the basis of so many people’s losses: Denying reality, trying to make a bad story cheery.

We are always at the bottom, it seems. It is always a great entry into stocks, and valuations are the cheapest in years. We are at the depths of the recession (again); the housing bottom is here (again and again), the economic turn has come. The selloff means a snapback rally is coming any moment.

Rather than embrace the downturn, with all of the chaos induced opportunity it presents, too many people are trying to manage the narrative of the markets. They are fighting the tape, not going with it. Being an optimist should not preclude you from being a realist.

During the boom, you were exhorted to ignore the worst Employment cycle since WWII. Nevermind the reality of the now deceased Goldilocks economy. Pay no attention to the surprisingly low rates — they are a conundrum, not a warning. Ignore the $100+ oil, Core Inflation is never a problem. As things started to slide, we were told that subprime was contained, that the rest of the world would decouple from the US, that leveraged derivatives were merely fantasies of the Doom and Gloomers. And when the fit hit the shan, the immediate instinct was to buy the dip.

Why? Its a function of the long-only complex that is Wall Street. Mutual Fund have no choice but to embrace every dip as a buying opportunity; fee-based bulge bracket firms are too colossal to nimbly to take advantage of the disruption; they can’t possibly get stopped out to avoid much of the blood shed.

What did BlackRock, one of the biggest (long only) management houses, manage before the crash, a trillion plus dollars? If they had market stops in place, what would 500 billion hitting the market as a stop loss do? It might take the Dow down 1000 points at the open.

Hence, why we see BlackRock’s CIO on CNBC’s Squawk Box for what feels like everyday for a year. Is it just me, or is he always talking about what a great buying opportunity this has been? I haven’t seen all of his appearances — just the ones where he likes stocks. If this keeps up, he may become the David Lereah of investing, as its always a great time to be buying stocks.

In investing, Hope is a four letter word. It reflects wishful thinking, not sober analysis. It is a function of your book, not an objective read of reality.

And its killing many investors.



Market’s ‘Hope Balloon’ Loses Air
Tepid Upturns Haven’t Stopped the Slide; ‘Hard to Make a Cheery Story’
WSJ, FEBRUARY 17, 2009

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