Bull and Bear

About Those Bulls and Bears

Bull and Bear

In the IFA Library of rare and antique finance-related books, we recently acquired a first edition from 1838 of Sketches of Imposture, Deception and Credulity. Although the author is officially anonymous, he was identified by Christopher Dennistoun as Richard Alfred Davenport. We concur with Dennistoun that the nine page account given of The South Sea Bubble was highly inspirational to the more widely known work, Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds.

While the entire section on the South Sea Bubble is fascinating, there was one footnote that caught our attention that we wanted to share with you:

“Bulls and Bears, those terms now so common on the Exchange, are another legacy of the South Sea speculation. He who sells that of which he is not possessed, is proverbially said to sell the skin before he has caught the bear. It was the practice of stock-jobbers, in 1720, to enter into contracts for transferring South Sea stock at a future time for a certain price; but he who contracted to sell, had frequently no stock to transfer, nor did he who bought, intend to receive any in consequence of his bargain; the seller was therefore called a bear, in allusion to the proverb, and the buyer a bull, perhaps only as a distinction. The contract was merely a wager.”

Davenport gave us a perfect description of a futures contract that is settled not by delivery of the goods but rather a cash payment. It is this contract that facilitates the hedging of future prices by both producers and consumers of practically any commodity you can imagine.  Liquidity in these markets is often provided by speculators who simply desire to make a wager on future price movements.

Through the years, there have been many explanations offered for the etymology of bull and bear such as the difference in the fighting styles of the two animals—the bull swings it horns upward while the bear swipes its paws downward. When the renowned economist John Maynard Keynes introduced the concept of Animal Spirits, he alluded to confident investors charging forward like a bull and pessimistic investors retreating like a frightened bear.

Regarding the question of whether investors today should be bullish or bearish, it is IFA’s view that every day going forward has the same expected return, and that return should appropriately compensate investors for the risks they bear. As for the incessant predictions of the pundits on CNBC, the word that comes to mind is bull. Investors would do well to remember this saying from John Kenneth Galbraith: "Pundits forecast not because they know, but because they are asked."