Bears: Exit Stage Left

A notable phenomenon of this past year of living dangerously in financial markets has been the triumph of the ultrabears: deeply pessimistic commentators and economists, such as Nouriel Roubini, who previously had only niche followings and have been propelled to rock-star status.

Million-dollar book deals, speeches at Davos, celebrities and statesmen lapping up your predictions of woe, gorgeous babes clustering around you—it's nice work if you can get it.

Am I jealous? Absolutely. More important, what does this runaway bull market in doom-mongering tell us about current investment prospects? To any contrarians worth their salt, it suggests that sentiment has reached extremes, as it did in the dotcom mania of the '90s. Back then, the talk was of "Dow 30,000" and the coming digital paradise. Now we hear confident forecasts of gold at $3,000, the collapse of the dollar, and the end of capitalism itself.

Is it fair to pair today's gloomsters with the wild-eyed dotcomers? The bears have much greater intellectual depth, they are more analytical, and they were correctly bearish ahead of the most serious financial crisis in decades. But remember that the dotcom gurus once had credibility too, having been bullish during an epochal market ascent. Being right gets you listened to, until you get it wrong; then people stop listening. And nobody, but nobody, is right all the time.

Furthermore, investment success has little relation to high IQ, doctorates, and Nobel Prizes. As Warren Buffett put it, ordinary intelligence is enough when combined with "the temperament to control the urges that get other people into trouble."

In fact, the dotcom gurus turned out to be right about a lot of things. The Internet transformed the way we work and play, devastating whole industries and turning geeky startups into gigantic global corporations. What they overlooked was the iron law of investment: the price paid is crucial to the returns generated. Pay a ridiculously high price and you'll get a ridiculously lousy return. Being right about everything else won't matter.