 "Valuations still too high")
An old question frequently aimed at bearish market watchers is, "Would you rather be right or rich?" Whenever I make a bearish prediction, somebody will cut/paste this and send it to me.
Though the repetition gets tedious, this is an interesting question from behavioural angles. First, anybody who makes a bearish prediction is sticking his or her neck out. For some deep psychological reasons, a bull who gets things wrong doesn't get much criticism. A bear who gets things right is usually accused of manipulating the market. And, a bear who gets things wrong is simply ridiculed.
Regulatory authorities, especially the Chinese in recent times, have often come down heavily on bears. All around the world, whenever there is a fall in prices, regulators indict short-sellers. Bulls are rarely indicted for the far more common 'pump-and-dump' strategy, where a stock is hyped to generate inflated prices.
There is also an either/or assumption embedded in the question. Strange, as a trader can be bearish and make money at the same time. Some of the most famous trades ever have been on the short side. In the currency market, a trader is automatically bullish and bearish at the same time, by definition - he must be short on currency B if he is long on currency A. The assumption underlying the question seems to be that only a bull can make money, and only when he or she is correct (presumably by buying stocks). Actually, somebody makes money on every single trade, as it is a zero-sum game. When the bull (or buyer) in a given trade is wrong, the bear (or seller) makes money.
There are a few arguments in favour of being always bullish. First, the mathematics is skewed in favour of bulls. It is possible to make many multiples of return on an unleveraged buy. The price of a stock can double or go up 10 times or even more. Whereas, it is not possible to make over 100 per cent on an unleveraged sale. The price of a stock can, at best, slide till zero. Though, of course, leverage and the use of derivatives makes it possible to generate a return of over 100 per cent on the short side as well.
It is also true stock markets display an upward bias. Entrepreneurs raise money to invest in businesses. If those are successful and the investments give reasonable returns, the stocks must rise. However, that upward bias might be interrupted by long periods of bearishness or periods when prices meander without trend. Two-year and three-year bear markets are common and so are sharp corrections in the middle of bull markets.
The psychological dimensions of being bullish or bearish are intriguing. It is possible an optimist is psychologically better equipped to handle either investing or trading. Any stock investor or trader must endure periods of uncertainty and drawdown. The optimist who believes in his positions probably suffers less mental stress and maintains better blood pressure. A pessimist is more likely to gnaw his nails or to simply lack the confidence to let a winning position accumulate.
Yet, there is no particular reason why a bear would be a pessimist, temperamentally. In fact, a bear could have a solidly optimistic personality. Someone who has faith in his judgement and logic will not be bothered by the thought that the market might go south.
One insight into this mindset comes from Warren Buffett. Over 60 years, the 'Sage of Omaha' has repeatedly said he welcomes price corrections as an opportunity. He has often put money where his mouth is. Then, there's Marc Faber, alias Dr Doom, highly successful as an investor, despite often making gloomy projections.
Pure traders don't care if they are long or short. That willingness to go in either direction is probably the best way to differentiate a trader from an investor. The trader might think objectively that the market will fall but this would not necessarily make him pessimistic. He would look for ways to make a profit from this.
A sharp, deep correction allows valuations to fall to levels where investors will get interested in bargain hunting. At present, the Nifty looks over-valued and needs quite a deep correction from here.
The index has dipped five per cent in 2016 but is still trading at a price-to-earnings ratio of 20.5. Far too high, given that earnings growth has been flat for two years. As an optimist, I hope the market corrects some more.
