The bears look back. The bulls look forward.

Investors’ psychology is fascinating. They react to what is happening. If the environment, as depicted by the press, is dismal, they panic. Emotions take over. Decisions are made to avoid stress, not to take advantage of opportunities.

Major market bottoms have always taken place in the worst of times. Economic failures of entire regions of the globe (as in 1997 in Asia, Latin America, and Russia), bank failures in the US (as in the 1970s and in the early 1990s), recessions and sluggish economic conditions, and special events such as concerns about the Y2K, have all been exceptional buy opportunities.

The majority of investors have a sense that bad times are associated with bear markets. What they fail to recognize is that markets move ahead of economic and financial conditions. The stock market (S&P 500) peaked in 1999 when liquidity began to grow more slowly. The economy slowed down in 2000-2001 because of decreasing liquidity. The market anticipated current conditions.

My point is that to be bearish because the economy is weak is like driving while looking in a rear view mirror. On the other hand, bullish investors know that the stock market and liquidity rise ahead of improving economic conditions. Their eyes are fixed on the developments that will create a favorable economic environment. Liquidity and stocks anticipate the “good times”.

You can rest assured that the next bull market will be almost over by the time the bears realize the economy is booming. They believe, mistakenly, that good times are associated with bull markets and will buy aggressively at the top.

Investment opportunities arise when there is a smell of panic and people are confused. You need to convince yourself that right now everything is being done in Washington to stimulate the economy. Taxes are cut. Spending is rising. Interest rates are reduced aggressively. Liquidity is soaring. The majority of investors are still afraid of what is happening (because they look back).

Everything that is happening, every little piece of information, points to a desperate effort to make the economy boom again. There is no doubt in my mind that this is the time to be aggressive and be fully invested. You have to look forward.

(These Obsevations appeared in the 11-12-01 issue of The Peter Dag Portfolio)

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
2009 Market Timer of the Year by Timer Digest

To find out more about my in depth views of the markets and my strategy just visit our website https://www.peterdag.com/ where you can subscribe to The Peter Dag Portfolio. You can also call me at 1-800-833-2782 to discuss your specific investment portfolio.

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