by Archie M. Richards, Jr., CFP^®
April 9, 2001

Investors were scared when Newsweek's October 12, 1998 issue hit the streets. The Dow Jones Industrials were down 17 percent from their July peak. The decline had included a terrifying drop of 500 points in a single day. In big bold letters, the Newsweek cover asked whether the nation would suffer a CRASH in 1999.

Crash, my eye! Just seven weeks after the Newsweek issue appeared, the Dow was up 21 percent. It continued rising smartly in 1999. At the sight of that bearish cover, readers would have been wise to load up on stocks immediately.

Fast forward to the March 26, 2001 issue of Time, whose cover shows a grizzly bear howling in triumph. I take this as a clear signal to buy stocks. Oh, you won't hit the bottom prices, that's for sure. But the chances are, you won't be far off.

It is not Time's purpose, you realize, to make its readers wealthy. Its purpose is to make the publisher's management and shareholders wealthy. To maximize advertising revenues, Time endeavors to attract as many readers as possible by writing articles with which people agree. Editors know what people feel comfortable reading. They know, for example, that when the stock market is scary, investors are attracted to bearish magazine articles.

In any particular bear market, people are most fearful when the prices are lowest. No one knows for sure at the time how low is low. But magazines such as Newsweek, Time, and BusinessWeek are remarkably accurate in guessing when investors have attained the highest level of pessimism for a particular down market. When a picture of a bear or the word "crash" is highlighted on the cover, a bull market often begins at about that time. The cover story itself matters little; what counts is the means of attracting attention on the cover. A bearish cover signals the start of a bull market. No investment technique works perfectly, but I know of none that has worked better.

A survey conducted by the American Association of Individual Investors in March 2001 revealed that only 28 percent of its members were optimistic about stocks, down from 56 percent a month prior. Heavy pessimism such as this also sends a signal: Forget the bad news. Buy stocks.

In the March 26 issue of The Wall Street Journal, a prominent money manager was quoted to say, "A steady rising market is unlikely to occur until a new generation of investors arises who haven't suffered in this wipeout." In other words, since the bearish sentiment won't change for a while, the market won't go up for a while.

Many people who are held up as market experts tend to agree. They believe that stock prices don't trend upward until investors begin to feel optimistic and that the prices don't trend downward until investors begin to feel pessimistic. But if those opinions were correct, here's what would happen: When stock prices are near the bottom, Time would picture a bull on the cover, not a bear. Before stock prices begin trending upward, surveys of individual investors might show the percentage of optimists rising from 28 to 56 percent, not declining from 56 to 28 percent.

No, when maximum pessimism prevails, it's time to buy, not sell. Sentiment does not lead the way. Instead, people become more optimistic as prices rise. They become more pessimistic as prices fall. Sentiment is conditioned by the price trend, not the other way around.

"Okay, smart guy," you say, "if sentiment doesn't control general trends in stock prices, what does?"

Sorry, pal, I don't know. Oh, I can guess about some of the ultimate causes: The amount of money made available by the Federal Reserve Bank. The extent of harm caused by government. The pace of technological advance. These factors may be useful in predicting market trends lasting for years. They're of little help, however, in predicting market trends lasting for days, weeks, or even months.

But a picture of a bear or a reference to a crash on a Time or Newsweek cover? Now there, we're talking turkey.

The headlines of two front-page articles in the April 9 issue of The Wall Street Journal both imply that recovery by the stock market and the economy will be slow. Headlined predictions are more likely to be wrong than right. Assume, therefore, that recovery will be swift. Don't wait. Commit your money to stocks now.