The kids are not all right - how young stock investors are bringing on a bear market

By Mark Hulbert

Shareholders who've never endured a prolonged market downturn believe they have nothing to lose

Younger investors are fueling stock-market speculation - and a bubble.

'They are too young to remember anything bad, and they are making so much money that they feel invincible.'Adam Smith, "The Money Game"

Young investors are accelerating the next bear market. That's because they are one of the major sources (if not the primary source) of Wall Street's irrational exuberance.

Investors who've never endured a bear market incur risks that anyone who has lived through a major downturn instinctively avoids. Their reckless behavior has caused the market to become dangerously speculative, making a bear market inevitable sooner or later - and probably sooner.

This argument is being advanced by William Bernstein (a neurologist and money manager, age 77) and Edward McQuarrie (an emeritus professor at Santa Clara University's Leavey School of Business, age 72).

"Here we are in late 2025, with rampant speculation in crypto, private equity, leveraged single-stock ETFs and leveraged private lending, to say nothing of stratospheric capex on AI infrastructure that depreciates faster than ice cream on an August afternoon," they wrote. "At the same time, the bear-market memory bank gauges of an ever-increasing percent of the population are now bouncing off empty: What could go wrong?"

'Kids market'

Younger investors undoubtedly will change their tune after they suffer their first bear market.

Younger investors undoubtedly will change their tune after they suffer their first bear market. Then this recurring cycle will begin again, as a new generation begins to enter the market and make fun of their elders for being foolishly risk-averse and old-fashioned.

Bernstein's and McQuarrie's argument is reminiscent of what Adam Smith, the pseudonymous author of "The Money Game," called a "kids market" - periods when Wall Street is dominated by investors too young to remember the last bear market. Smith quoted the owner of a Wall Street firm called The Great Winfield, who during kids markets only hired investment managers who were not yet 30 years old: "The strength of my kids is that they are too young to remember anything bad, and they are making so much money that they feel invincible. Now you know and I know that one day the orchestra will stop playing and the wind will rattle through the broken window panes, and the anticipation of this freezes [the rest of] us" who are old enough to remember.

The Great Winfield added that "memory can get in the way" of a kids market. Those with memories of a bear market have a "malaise that comes with the instantly gone, flickering feeling of déjà vu: We have all been here before."

By Smith's standards, this is most definitely a kids market. It's been 17 years - a generation - since the 2008 downturn and almost 26 years since the bursting of the internet bubble. And, as you can see from the chart below, the percentage of the U.S. population that was old enough to be active in the stock market during the October 1987 crash - the worst in U.S. history - is small and shrinking.

Remember history, or repeat it

Many major U.S. bear markets have begun once in a generation, or about every 20 years.

Is there anything that can be done to break this cycle? Probably not, according to Bernstein and McQuarrie. They note that it's more than just a coincidence that many major U.S. bear markets occur after a bull market has lasted about one generation. For example, the 1999 market top, they wrote, came "17 years into a long-term bull market, or 1966, once more 17 years. Or 1873, 16 years in, or 1837, 18 years in, or 1893, 20 years in - to name a few of the notable tops over the past two centuries. Just long enough to produce empty memory banks in just enough investors."

Bernstein's and McQuarrie's essay is entitled "The Peter Bernstein Rule: Beware Empty Memory Banks." They are referring to the late Peter Bernstein (no relation to William), the famous financial historian, educator and first editor of the Journal of Portfolio Management. In the wake of the bursting of the internet bubble, Peter Bernstein had written about investors' memory banks, which William Bernstein and McQuarrie summarized: "The market experience that accumulates in their hippocampi over their investing lives and molds their investment strategy."

Human nature is the root cause of the boom-and-bust cycle's inevitability, according to McQuarrie. He said in an email that "if there is no bear market in memory, the pressure to go 100% stocks (or 200%) is irresistible in the collectivity. The few, the proud, the brave might resist ... but they must indeed be few."

Hope that a bear market occurs early in your investing career.

Can a young investor, without actually living through a bear market, study enough history to adequately fill his memory bank? Bernstein and McQuarrie are doubtful, though they are in favor of studying history. But "there's a difference... between being told that markets can fall by more than 50% and having it burned into your memory banks by seeing your net worth halved in real time as the economy careens toward the precipice."

What is a young investor therefore to do? One solution is to enlist the services of a financial adviser who is old enough to have lived through bear markets. Bernstein suggests that, in addition to asking potential advisers the standard questions about track record, fees, and so forth, you also ask them their age - and consider hiring an adviser who's experienced a bear market firsthand.

Ideally, investors should get involved in the market at a young age and hope that a bear market occurs early in their investing career. Bernstein said he urges parents to "set up a toy UGMA [Uniform Gifts to Minors Act] account [when their kids are] around age 9-10, have a quarterly investment meeting, [let] the kid gets to keep half of that quarter's gains (no high water mark), [and] pray for a bear market. My kids were 14-18 during '08, they got to see their portfolios cut in half. A useful lesson, that."

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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-Mark Hulbert

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