A Bull Turns Bearish And Becomes Outcast
Wall Street Journal, July 26, 1999

This is a stock market that can turn a genius into an outcast faster than an online trader can say "buy." Richard Bernstein realizes that now. The past year for the high-profile Merrill Lynch & Co. quantitative strategist has been three months of ecstasy followed by nine months of agony.

In a flash of brilliance a little more than a year ago, Mr. Bernstein warned investors to pull back from stocks. Coming just before Asian and Russian financial trouble sent stocks plummeting, it was his most timely call ever on the overall market. It won him widespread praise. He appeared on television and in the newspapers. Clients were impressed.

"I said to my wife, 'I've never looked this smart before,' " he recalls. But the experience proved fleeting. Now, Mr. Bernstein is the latest of many naysayers to be punished by the great bull market of the 1990s.

In October, with his stock-valuation models showing that stocks could fall further, Mr. Bernstein told clients to pull back more. It was bad advice. As fall turned to winter, big stocks climbed to record after record. He stuck to his guns, and his greatest triumph disintegrated into his most embarrassing blunder. Mr. Bernstein endured a hail of angry calls and letters from clients and Merrill brokers.

"People get very emotional. I've taken a lot of ear-blastings," says the 40-year-old number-cruncher, who had been one of Wall Street's longest-standing bulls, a resolute backer of big stocks since 1994.

The dark side of the stock market's heady gains in recent years has been that so many Wall Street veterans are wringing their hands instead of applauding. Many investors and analysts today once again see the biggest, most glamorous U.S. stocks as big risks.

Just last week, worries that stocks have risen too far roiled the market again, sending indexes down sharply on Tuesday and again on Thursday and Friday. he Dow Jones Industrial Average on Friday fell 58.26 points, or 0.5%, to 10910.96, leaving it down 298.88 points, or 2.7%, for the week after starting it at a record high.

Bulls see stocks surging ahead again, completing an unprecedented fifth straight year of double-digit percentage gains. But to many analysts such as Mr. Bernstein, who still use standard stock-valuation techniques, the highfliers look precarious. Although the overall market has thumbed its nose at him for months, Mr. Bernstein says his models show that recent stock gains are "a bubble." He vows that events will vindicate him.

"I've got to tell you, the past few months were the most perplexing time in my career," he says, calling it a "humbling" experience. "You have a set of indicators that have worked real-time, not just back-tested, but in real time. They have signaled market shifts before. This time, they gave their signals, they gave strong signals like they never have before, and yet nothing seemed to happen. The stock market kept chugging on and chugging on. I happen to believe that this is a pretty speculative market, because I haven't lost faith in those indicators."

For years, Mr. Bernstein was a steadfast bull at a firm whose corporate logo shows a drawing of a raging bull, but whose strategists often have been bears on stocks in recent years. He delighted Merrill brokers, making it easier for them to sell stocks.

But as 1998 dragged on, all of his valuation models -- which use various mathematical formulas to measure stock prices against things such as corporate earnings, interest rates, economic growth and investor sentiment -- began blinking red: time to sell.

He turned "cautious," as he puts it, around the end of June 1998, urging clients to sell some stocks and shift toward bonds. When big stocks plummeted 19% from mid-July through the end of August, he looked like a genius. Then the roof fell in, for him at least. As he urged clients to keep selling stocks, the market turned up.

"As a quantitative analyst, I am supposed to be very disciplined," he says. Especially because corporate earnings still looked weak, he told clients not to buy back into stocks. As his skepticism was proved wrong, some clients, and some Merrill brokers and salesmen who had lost a stock booster, showed their anger.

"I wouldn't call it hate mail -- that would be far too strong a word," Mr. Bernstein says. But he got "that personal mail and e-mail questioning your sanity." "I think I've lost a lot of credibility among the client base." Some television commentators started deriding his views. The worst moments came early this year, when the phone stopped ringing. "People felt I just didn't have anything to offer," he says glumly.

One reason for the strong reaction: Most Wall Street strategists don't stick their necks out as far as Mr. Bernstein does. They tend to tweak their recommendations, pulling 2% of their assets out of stocks at a time, rather than going from bull to bear as Mr. Bernstein did. "My view is, no guts, no glory, so you take the good with the bad," he says.

To boost his morale, he calculated how clients would have done if they had listened to him. The faithful would have benefited from a 3 1/2-year total return on the S&P 500-stock index of 165% from 1995 through mid-1998. They would have missed the chance to push that gain over 200% by staying in stocks over the past year.

In his defense, Mr. Bernstein stresses that, especially for professional money managers who are required to stay entirely in stocks, his overall market views don't really matter; what matters is his analysis of which stocks to buy. Mr. Bernstein says his advice there -- urging clients to own the fast-growing "Nifty Fifty" market leaders until May of this year -- was good.

And to his relief, the phone calls started streaming in again in the spring, as the stock market hit a rocky patch. His face reappeared on television. His expectation of a weak economy and weak earnings had been wrong. But as the S&P 500 began trading at a record 37 times its components' earnings for the past 12 months, people began to wonder again whether his warning about an overvalued stock market had some merit.

In May, with the economy heating up, he urged clients to dump the "Nifty 50" in favor of the "not-so-nifty 450" stocks in the S&P 500. He says a recovering economy will help the laggards, such as small stocks, out-of-favor industrial stocks and developing-country stocks.

Mr. Bernstein also has some personal business to attend to. This past fall, he bet an analyst at Fidelity Investments a dinner that stocks would fare poorly. Now he must pay up. "The problem is that he gets to pick the restaurant. It could get expensive," Mr. Bernstein says. And he acknowledges that some clients and brokers still are wounded.

"There is an old saying on Wall Street," Mr. Bernstein says. "If you are a bull and you are wrong, people say, 'He was a nice guy, but he got it wrong.' But if you are a bear and you are wrong, people hate you."

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