The 2008 bear market and recession appears to have permanently damaged investors’ psychology. Despite the ongoing bull market, investors generally remain quite scared of traditional long-only equity risk. Although some surveys are beginning to show increasing enthusiasm for stocks, actual public equity allocations among individual investors, pensions, endowments, foundations, and hedge funds remain more focused on limiting the downside risk of public equity holdings than on potential opportunities.

The current financial media is full of discussions predicting imminent bear market, the collapse of a sector, or some extreme speculation that “will end badly.” Bulls who aren’t advocating equity-income strategies are treated with suspicion, whereas bears, many of whom have missed the entire 8-year bull market, are considered wisely prudent.

It seems to us that this is definitely not the sentiment backdrop that tends to accompany a stock market peak. Investors tend to be wildly bullish when a bull market is in “the bottom of the 9th inning with 2 outs and 2 strikes on the batter.” We can find no investor class that is showing such over-enthusiasm for stocks.

Of course volatility and corrections can occur at any time, but we strongly doubt that anyone can consistently time short-term market gyrations. More importantly, investors need to objectively consider the probability of a full-blown bear market. Currently, we’d argue the probability of a bear market is meaningfully lower than most investors suspect.

Futile attempt to time the market short-term

As we’ve repeatedly demonstrated, trying to time the market on a short- term basis is a futile exercise. In fact, intra-day trading is like flipping a coin. The probability of a trade making money on an intra-day basis is about 50/50 (i.e., like flipping a coin), whereas investing with longer time horizons has a considerably higher probability of being successful.

The S&P 500® has produced positive 10-year returns 95% of the time, and positive five-year returns 88% of the time. Even quarterly returns have been positive 68% of the time. To myopically focus on the short- term downside risk of public equities seems to be fighting history.