Taking Advantage of the “Madness”

Jul 2010 //
History
Optimism/Pessimism

Think back to early 2000 for a minute.  The S&P 500 had just completed five years averaging over 25% annual returns, and most investors felt quite bullish about the “new economy.”  What happened next?  The S&P 500 declined about 40% over the next 2 – 3 years.  As a result of the market’s decline, many investors then turned bearish.  What happened next?  The S&P 500 gained about 100% over the next five years.  After that gain, investors became bullish again.  What happened next? The 2007 – 2009 stock market decline.  As a result of that scary experience, many investors became quite bearish.  After that spike in pessimism, what happened next?  The S&P 500 produced sharp gains over the following year.  Today, with the S&P 500 down over 15% from its April 2010 high, the pessimists are out in force again.  What do you suppose will happen next?  Call us crazy optimists, but we’re confident pessimism will crest at some unpre­dictable point (unrecognizable at the time), if it hasn’t already, and the stock market will rise once again.  As old and consistent as this cycle of investor sentiment and stock market returns is, some investors continue to sell at lows, when they feel pessimistic, only to buy again when they’re feeling better at market highs.  Our job is not to follow this madness, but rather to take advantage of it.