Bullish on Stocks? Think about this for a moment

To be perfectly candid, I am not saying stocks are “a bubble” today. I am not saying prices are “ridiculous.” I am not saying the things that some of the louder doom-and-gloomers are howling about the coming devastation.

But I certainly think that what’s happening today is, in large part, the result of unsustainable easy-money policies from the Fed, and that it is too good to last.

One of the most important things you can do as an investor is to try to seek out smart arguments that lay out the opposite side of the views that you hold. In other words, if you’re bullish, you should seek out smart bears, and vice versa.

And if you’re so sure that stocks are just going to keep going up and that anyone who voices caution is a moron — then at least think about this

Someday, financial markets will again decline. Someday, rising stock and bond markets will no longer be government policy – maybe not today or tomorrow, but someday. Someday, QE will end and money won’t be free. Someday, corporate failure will be permitted. Someday, the economy will turn down again, and someday, somewhere, somehow, investors will lose money and once again come to favor capital preservation over speculation. Someday, interest rates will be higher, bond prices lower, and the prospective return from owning fixed-income instruments will again be roughly commensurate with the risk.

Someday, professional investors will come to work and fear will have come to the markets and that fear will spread like wildfire. The news flow will be bad, and the markets will be tumbling.

Six years ago, many investors were way out over their skis. Giant financial institutions were brought to their knees…

The survivors pledged to themselves that they would forever be more careful, less greedy, less short-term oriented.

But here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking the prudent course. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs.

Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.

I admit that I don’t know when the current euphoria will end.

In an environment when market pundits are supposed to have a black-and-white, minute-to-minute view of what the market will do next, this admission is startling. And it’s also true.

No one knows that the market will do next.

I am looking though at the current level of stock prices and comparing them to average prices over the past 150 years. And, based on these prices (and other factors, like the Fed), I am coming to the conclusion that stocks have a lot of downside risk.

I may be wrong. … But if you are confident that that’s what stocks will do, at least do yourself the favor of thinking carefully about why you believe that—that you’re not just optimistic because the last 5 years have been so good and that you have a strong fundamental thesis to support your views. And be comfortable with the 40%-50% downside that you might experience if you are wrong.

Because hope is not a strategy. And no one benefits from ignoring smart folks on the other side of the trade.

Share your thoughts…

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Ziad Abdelnour is a political activist and is the Founder and President of the United States Committee for a Free Lebanon.