Permabear

 I was reading in the Wall Street Journal yesterday about the career of the value investor Jeremy Grantham, sometimes known as the "Permabear." He has been saying for years—if not decades, at this point—that the entire equity market is in a bubble. We're talking more than just an "AI bubble" here. Plenty of people think those stocks are criminally overvalued right now. Grantham does them all one better—he thinks that the pricing of the entire stock market has gotten unmoored from any rational relationship to underlying earnings and other measures of intrinsic value. 

He's probably right; and this week is offering him a measure of vindication. Panic about new AI tools—and how quickly they can be used to build software performing a wide variety of specialized functions, with minimal if any knowledge of coding required—has sent software stocks into a tailspin. This "Anthropic" effect has been enough to pull down the larger tech sector for a few days, plus the larger stock indices—the Nasdaq and S&P 500—that are most reliant on it. Meanwhile, investors are "rotating out" into previously less favored parts of the market: mid-caps, foreign stocks, "defensive" sectors, etc. 

I felt a small taste of vindication myself, too. From the moment in my early thirties, when I started to build a stock portfolio for myself for the first time, I have been a ludicrously cautious investor—convinced that I had to proceed on the assumption that I was buying in at the very end of the party, and that the entire market was doomed to blow up as soon as I entered. I therefore sought maximum diversification and minimal risk exposure. (After all—for the same reasons Grantham cites—the price-to-earnings ratios, etc.—it appears that stocks really are obscenely overvalued.)

And yet—since I started investing three years ago, stock prices have just kept going up. All of my precautions and prophylactic diversifications appeared needlessly pessimistic. Friends and relatives who had their money in a handful of high-flying tech stocks—NVIDIA, Google, Amazon, etc.—could sneer at my measly 8% annual returns or whatever they had been, when their own portfolios were averaging twice that. Here I was with my money in CDs, consumer staples, Campbell's soup, the manufactures of Kleenex, real estate, Morningstar's picks of "undervalued" gems, and so forth. 

In Philip Roth's The Anatomy Lesson, he writes about how his alter ego Nathan Zuckerman—once he had any spare money for the first time in his life—had to be "weaned [...] reluctantly away from his triple-A bonds" by people who actually understood investing. He was just too risk-averse. And indeed—I understand the impulse. Some people in this world are motivated, perhaps, by wanting to avoid the "fear of missing out." "What if the market goes up and I'm not in it?" But for the rest of us, a rival fear is much more motivating: "What if I invest at exactly the moment everything goes south?" 

More than anything, then, I had always sought to hedge risk and diversify as much as possible. If this means lower returns, it is worth it to me for the sake of peace of mind. There is some line from Charlie Munger about how a market portfolio "shouldn't be like Noah's Ark—two of everything." And that's a cute metaphor. But I've often thought it would sound equally convincing if the conclusion were reversed: it should be like Noah's Ark—two of everything. 

And that's exactly what I've tried to acquire. If I own a small amount of everything—I tell myself—then on any given day, something will be doing well. 

The past few years of ludicrously inflated stock valuations have been hard times for us pessimists. Many people might be wishing that they had put everything in NVIDIA six years ago, and skipped the dutiful countervailing investments in potato growers or whatever. But this week was finally one in which the permabears could shine. 

At the end of trading hours the last two days, I saw the headline sticker prices for the major stock indices, and I shuddered. It looked like carnage, due to the slide in prices for major tech companies. But when I opened my own brokerage account—voila; valuations were up for the day. 

I thought at first there must be some glitch. Then I finally realized—for once my strategy of hedging had actually worked. The major U.S. indices might be down; but international stocks were up, real estate was up, gold was up, mid-caps were up, etc. It had finally paid to be a pessimist. 

Cold comfort, perhaps. And to be sure—if the panic about software stocks ripples out far enough into the rest of the market, there will eventually be no safe haven anywhere. If the "AI bubble" or the "everything bubble" really do burst at one point, it won't save you to have also squirreled away a few shares of consumer staples stocks or French grocery chains somewhere. The whole market will decline, with no obvious port in the storm. 

But for one day at least, I was able to take a sort of gloomy pride in the vindication of my own pessimism. I thought of the lines of A.E. Housman—which ought to be a motto hung over the door of Jeremy Grantham and every other permabear investor on the market: The thoughts of others / Were light and fleeting, / Of lover's meeting / Or luck and fame./ Mine were of trouble, / And mine were steady; / So I was ready / When trouble came.