by Archie M. Richards, Jr., CFP^®
March 5, 2001

Here's the good news: Pessimism is becoming as thick as molasses.

True beliefs are often revealed in advertisements. Advertisers want people to act. It's easier to persuade people to act if the message contains ideas with which they agree. Advertisers and their agencies therefore keep their antennas raised to detect as reliably as possible what people actually think.

The February 26, 2001 issue of The Wall Street Journal contained a half-page ad picturing a herd of bears pursuing terrified people in suits. The headline read, "Where to Invest, Now That Little Seems Safe." This confirms what you know already: Investors feel unsafe. But you should also know that it is at such times that bull markets begin.

In the next day's issue of the WSJ, a brokerage executive is reported to say that momentum investors, who buy in anticipation of prices continuing to rise, have largely vanished. "Another type of investor has stepped up," he says, "who is more interested in downside protection." This is good to know. Investors and their advisors generally look for downside protection at the very time they no longer need it.

The Consumer Confidence Index for February 2001 declined to a level not seen since 1996. The Dow was then about 5700. It's now 10,466, for an annual gain of over 14 percent, including dividends. This shows that when consumer confidence is poor, it's time to buy. If you consider 14 percent a year (including a bear market) to be too low, you belong in Hollywood , where dreams are made.

Underlying financial conditions look even better to me than they were in the 1990s. The electorate is becoming ever more conservative. Technology is advancing ever faster. And the Fed, which is largely responsible for the current slowdown, is less likely to make the same mistake again. In my opinion, the stock market should advance as fast in the next ten years as it did in the last ten.

Back in the late-1960s, politicians were squabbling about how much to raise tax rates. Because of this and other miserable policies, the U.S. during the 1970s suffered a wretched stock market, abysmal growth, high unemployment, soaring inflation, and sky-high interest rates.

Politicians are now squabbling about how much to lower tax rates. Because of this and other helpful changes, I look for high growth, rock-bottom unemployment, little or no inflation, trifling interest rates, and, oh yes, a soaring stock market.

Bad news affects people more than equivalent good news. Perhaps this is because early man wanted to protect his children from tigers. Whatever the reason, modern man considers a 40-percent portfolio gain to be pleasing but a 40-percent decline to be agonizing. Good economic news is humdrum, bad news disastrous.

Take advantage of other people's fears. The only tigers left in America are in zoos. If you hold a broad portfolio of stocks, do not sell. If you hold cash, buy a broad portfolio of stocks. Don't buy piecemeal, either; put it all in now.

"Okay, Archie," you say. "If you know so much, how come you didn't tell me to sell last spring?"

I never tell anyone to sell in anticipation of bear markets. You can make pretty accurate guesses about bull market beginnings, but no one consistently spots bull market endings. There is seldom enough uniformity of optimism.

The anticipation of a bear market requires three correct predictions. Your sales must be timely. The price declines must be greater than the capital gains taxes incurred. And your subsequent purchases must be on the money. The chances of guessing all three correctly are slim. The chances of guessing all three correctly on several occasions are nil. If you miss the timing just once, you're way behind.

Here's what's more likely to happen: You sell. But the market continues rising, so you get back in. The market then falls. Having sold too soon before, you hang on until the economic news turns ominous. With your self-confidence shattered, you become more attuned to what other people think. They're bearish, so you sell. The market immediately rises. Figuring that the stock market is no place for you, you stay out. Later, you realize that your money would have doubled had you stayed in all along. You buy again, and . . .