Bulls make money, Bears make money, and the Sheep get slaughtered.

When people discuss the stock market, they invariable talk in terms of Bulls, Bears and Sheep (and sometimes Hogs). While this analogy has great explanatory power to people who don’t actively trade or invest in the stock market, the truth is, the limitations of the analogy outweigh the uses.

The Market is not made up of Bulls and Bears, it is not made up of people who can be pidgeonholed into one or another position, either on the market as a whole, or even on a stock in particular. Even though many people may think of themselves as “Bullish” or “Bearish”, these terms belie a belief that a person really has a rational opinion about the market or a stock, and is acting from a reasonable place.

The first thing to understand is that the stock market can never, ever be rational. It cannot be rational because it is forward looking. Investment, and trading take place on expectation, not rationality. This doesn’t mean that a single actor within the stock market cannot be rational, they can be. But the Market itself is the sum of all hopes and all fears of all participants at all times.

Consider for a moment a man who works in an office. He works from 9am to 5pm. At the end of the day, he no longer wants to be at work, and wishes to be at home. The most rational course of action for him is to get into his car and drive home by the most direct route. Unfortunately thousands of other people are making the exact same rational decision. Where does he end up? Not at home, but sitting in a slow moving traffic jam. The point is that large systems, which are the sum of all decisions within those systems, even when all those decisions are absolutely rational and reasonable, can still end up irrational.

The most irrational outcomes arrive not from individual irrationality, but actually from crowd based irrationality. The stochastic nature of the stock market is a function of demographics making rational decisions in the moment that lead to irrational and apparently chaotic outcomes.

The limitations of the Bears vs. Bulls is that if such a thing actually existed the market would not move, for every buyer there must be a seller, and each of these people is more often than not motivated by complex emotions.

Let’s take an example: As a stock (say XYZ) moves up or down from the inevitable noise caused by orders which move up or down in small increments, there is a chance that a point will be reached where the risk to some institutional traders portfolio gets too close for comfort. Perhaps he’s a junior trader, he is “bullish” on a basket of stocks, but on some he’s more bullish than others. Because he is instituionally required to cut a stock when it reaches a certain risk level, he sells out of the position for no greater reason than the basic daily bureaucracy of the trading world. His sale of a rather large position contributes to a slight downtick of XYZ.

Somewhere else, far off in the world are various traders who bought the stock awhile ago, and have been through few nerve wracking ups and downs. Now that they are up, they are wanting to consolidate their gains and move on to other areas. When they see the downtick, they decide they’ve had enough of this stock, the swings are too much, so they sell. This contributes to a further downtick.

This downtick is just enough to hit the poorly placed stop losses of a small population of retail traders, but just enough to add to the down volume and produce another downtick.

A major 24 hour market news channel who’s desperate to remain relevant maintains a stable of “analysts” who they rotate around depending on what is going on. On noticing this now large downward movement in XYZ, they find the analyst in their pool who has a “bearish” opinion on XYZ and it’s over to you Bill Bearington. Bill Bearington spends 30 seconds making the bearish case (which always exists) for why XYZ is down.

Now even more people, who previously were “Bullish” on XYZ decide to sell out, out of fear that it will go down (which is only legitimate because they act on their fear). The stock plunges even further.

What is missing from this equation is the other side. Every one of these sellers had to sell at some price. Which means that someone on the other side had to be buying into them.

In the above example, in late April, $DNKN was doing great, it had great earnings expectations (which it later beat on EPS). Suddenly, CNBC had an interview with Jim Chanos, who revealed he was shorting the stock, this lead to a large dip (about 8% at one point IIRC). Anyone who bought against that panic made money, a decent profit could have been had.

It is obvious that this is not a battle of rational actors, or people doing things in reasonable ways. The price of a stock always goes up, and always goes down. It’s actually quite rare for a stock to stay down forever, especially if it has even nominal fundamentals. Stocks have a tendency to range as much as 50% in a 52 week period.

There is no single reason this ranging, it is the sum total of a lot of reasons, many of them have no rational basis in an expectation as discrete as “bullish” or “bearish”. The person who sells, expecting the stock to go down is a fucking moron. They are not bearish, they are self-sabotaging. By participating in the herd cycle of buy-fear-sell, their expectation becomes a manifest destiny. They create the very thing they fear!

The market is a great ocean, filled with various currents, tides, that ebb and flow. These tides are constantly interacting with each other, it is usually the confluence of greed and fear which causes selling, it is usually the intersection of greed and envy that triggers a rally. I specifically use envy here because most actions in the market are a function of monkey see, monkey do. Lots of people are investing in FAANG’s these days, they’re making money, I want to get that money too.

If you buy a sector because others are buying a sector, then you are already a loser. You need to be ahead of the curve, you need to be buying when others are selling, in expectation of the turnaround (if you’re a trader in say 1-3 months). I bought oil stocks when Oil was shit and held them from about 5 months before anything happened. I was a bit early. But you know what I did? I just turned off my charts, and looked at my portfolio once a week. On Saturday. Just to keep myself from selling off when there was a dip.

I picked some good stocks, and some bad ones. $CHK turned out to be a shitstain. I was up at one point, but it went back down and stayed there. I was patient, in the end, I cut it loose and lost about 0.10 per share. It was a small position, so it didn’t hurt. I wasn’t very sure about it anyway, so I didn’t risk much. I would say about 70% of my positions didn’t pan out, and I cut them. I still made 20.1% after losses.

After I did that I thought I was pretty hot-shit, so I started trading more, a lot more. I would make a small amount, and then lose it the next day or week. In the end, I broke even thankfully. Day Trading isn’t for me, it’s just too much noise. Now that I am back to longer term trading (1-3 months forecast), I am up 1.35% with what I feel are solid positions.

The point is not that I am super smart, or good, or experienced. The point is, I’ve been in the position of someone selling out of a position. It was pure emotion, it was primitive, there was no Bullish, there was no Bearish, there was just “holy-crap I need to unfuck this position now or the world is going to explode.”

This is why I’m a fan of Behavioral Finance, for me it has a much more realistic explanatory power for Markets than say the Efficient Market Hypothesis, or even the Broconomics of your average retail trader. It’s for this reason I find Bulls vs. Bears to be unhelpful, because it denudes the actual primitive crowd based emotions as well as the bureacratic inefficiencies which make the market lucrative, but also dangerous.