Super-Bears Feed on Fear, Ignore Logic of Investing
In a super-bull market like this one, there are two sure-fire ways for an author to get investors’ attention. One is to promise a list of the “10 hottest” something (stocks, mutual funds, brokers, whatever).
The other is to use a photo of a brilliant white mushroom cloud on your book cover, under a provocative title like “The Coming Mutual Fund Meltdown.”
The latter is, in fact, the latest handiwork of Gary North, a Texas-based survivalist investment advisor. North predicts, to quote from Page 1 of his book, a “spectacular” stock market collapse “which will be initiated by panic-driven mutual fund redemptions.”
We’re not just talking standard bear market here. North believes that the long bull market has reached a mania stage fueled by unprecedented greed. When this market crests and begins to decline, he says, the confidence now felt by millions of investors will be replaced by a debilitating fear of losing money--a fear that he expects will feed on itself, causing a massive reversal of the stock fund buying of recent years and hence a total market collapse.
Does he have your attention yet? No doubt. North is an old pro at this. He has written 33 books on markets and the economy, most with government-bashing, survivalist themes.
And North is hardly alone. He is a member of a fairly large fraternity of advisors, including such better-known names as Robert Prechter, who have made a living out of warning that the end is nigh for stocks’ boom.
Give them credit for persistence: Some have been calling for the cataclysmic end of this secular bull market almost from the day it began in 1982. The short, though nasty, bear markets of 1987 and 1990 just taunted the doomsayers. They want to see absolute, long-lasting devastation, with nearly every investor a victim.
So far, however, “victim” better describes the followers of these super-bears.
“Greed is a powerful emotion, but it’s nothing compared to fear,” North writes, describing how he expects fear of loss to eventually provoke a mammoth stock crash. In the meantime, playing to people’s base fears is, of course, a good business for North, with books and newsletters to sell.
Yet if, being too afraid of stocks, you’ve kept your savings in a money market fund for the last five years, you’ve earned about 22%. The return on the average U.S. stock fund in that period: 95%.
How does North feel about opportunity lost? His publicist said he declined to be interviewed. “He values his privacy,” we’re told.
In his book, North exhibits the persecution complex that variously afflicts most doomsayers. “One of the problems with warning of hard times ahead is that people don’t want to hear about it,” he writes.
Let’s say this upfront: Cassandras such as North do serve a purpose. They are a sobering element in a bull market, reminding people that things aren’t always this good for stocks. If that makes someone think twice about investing every last penny, or if it causes someone to reevaluate how much risk they want to take with their investments overall, so much the better.
The problem with North, whose resume humbly declares him “the nation’s No. 1 expert on protecting investors from government blunders and policies of confiscation” (Montana Freemen, are you listening?), isn’t so much his disdain for stocks as his advice on what, alternatively, to do with your money.
First off, naturally, you’re supposed to give North some of your cash by subscribing to his monthly letter, Remnant Review, for $97 a year. And you are strongly advised to sign up via the automatic, quarterly, credit card billing method, which, North obviously hopes, will keep you on board in perpetuity.
North then spends much of the rest of his 141-page book trying to justify why selling your stocks now, and especially your stock mutual funds, is the only prudent decision. Laced with biblical quotes, the book describes the wave of fear that North expects to sweep investors, leading to a mad rush to redeem mutual fund shares. The redemption requests will be so overwhelming, he says, they will cause telephone gridlock and the meltdown of the fund industry.
“The system will be shut down. Count on it,” North prophesies.
And what, exactly, will trigger the selling panic? We aren’t told. North’s forecast seems to derive simply from the idea that stocks have gone up for too long, in his opinion. He talks about stocks being “higher than they’ve ever been.” But there is scarcely a mention of valuation, of stock prices relative to underlying corporate earnings or to interest rates, which are the driving forces behind the market in the long run.
Assuming you decide to sell your stocks, here’s what North then recommends:
First, you should consider “shorting” stocks, which means borrowing shares and selling them, hoping that the market price plunges so that you can replace the borrowed shares later with cheaper ones. A great moneymaker, when it works. What North somehow forgets to mention is that if you’re wrong on a short sale, your liability is potentially limitless: If the stock price rises instead of falls, you keep losing until you finally close out the trade.
Second, North also likes commodities (gold, etc.), but what good survivalist doesn’t?
Third, the same North who predicts the meltdown of the mutual fund industry then goes on to recommend two funds: the Franklin Hard Currency fund (a play on the collapsing dollar he foresees) and the India Fund, which exclusively owns Indian stocks.
How an investor who expects the fund industry’s demise and financial panic (“Escape from New York,” North warns Gothamites) is supposed to feel confident enough to buy North’s favorite funds is the biggest logic stretch of all. The world as we know it is ending, so send your money to Calcutta. Right.
Finally, North holds out the promise of another great bull market someday--but hints that only he can tell you when to buy.
Will a bear market come, eventually? Of course. Will many investors who have piled into stock mutual funds over the last five years be frightened out of them when the market plunges? Probably. Could the next bear market lead to economic depression, the demise of the dollar, social ruin and assorted other disasters as trumpeted in North’s book? Maybe.
But if you believe that, you don’t need Gary North to figure that the best investments of all probably are shotguns and canned food.
