The Crowd is Bearish... So it’s Time To Get Bullish

A $3 billion dollar bet against the stock market in 1991 was par for the course for Stanley Druckenmiller, one of the most successful investors of our time.

You may not have heard of him, but Druckenmiller is as big as it gets. He managed billions for the legendary investor George Soros... and earned investors returns in excess of 30% for decades.

Two of Druckenmiller’s keys to success have been 1) he's not afraid to put big money on an idea, and 2) he's not afraid to switch 180 degrees when conditions call for it and bet the other way.

In late 1990, Druckenmiller was selling billions worth of stocks short and making a mint as stocks fell. He felt that the U.S. was in trouble. But early in 1991, he sensed it was time to change direction, if only briefly:

"On the way down, the pessimism regarding the U.S. stock market had become extreme. Everybody was talking about how the market would crater if the U.S. went to war with Iraq.

"[On January 13, 1991] I was still short stock. On that day I spoke to Paul Tudor Jones, who had just returned from participating in a roundtable discussion sponsored by Barron's. He told me that eight out of the eight participating money managers had said they were holding their highest cash position in 10 years. I'll never forget that the S&P 500 was near 310 and Paul said "340 is a chip shot."

Druckenmiller saw an extreme level of pessimism towards stocks.... everyone was out of the market because of a possible war with Iraq. He acted against his fundamental beliefs to capitalize on a brief opportunity where people were scared and people had too much cash. His bet paid off....

The S&P 500 Index was up 20% in one month (from mid–January to mid–February). If Druckenmiller had $3 billion in that trade, he made $600 million in a month.

The conditions today are similar to what Druckenmiller saw in 1991. Investors are incredibly bearish right now...

The latest data is out, and 58% of individual investors expect the market to fall over the next six months (based on a weekly poll by the American Association of Individual Investors).

This number is an extreme. To give you an idea of how extreme it is, consider this indicator during the month of October of 1987, the month of the worst stock market crash in our investment lifetimes... The highest weekly percentage of bears (individual investors thinking the market would fall over the next six months) during the month of October 1987 was only 33%.

Said another way, the common man is way more gloomy about stocks right now than he was at any time during the month of the worst crash in our investment lifetimes.

We’ve only seen the percentage of bears get higher than this once before... And that was in late 1990, smack dab in the middle of the only “real” recession in the last 24 years (there was a mini-recession in mid-2001).

At that time, over 60% of individual investors thought the market would be lower in six months time. The stock market surprised everyone, by rising nearly 25% in six months. Both the tech-heavy Nasdaq and the Russell 2000 small stock index were up nearly 50%.

While the recession of 1990 was the only time we’ve seen individual investors more bearish than they are right now, there was one instance where individual investors were equally as bearish as they are now... and that was the end of February in 2003... a great buying opportunity.

I could go on all day how bearish sentiment creates great buying opportunities, but we like to keep DailyWealth short... and you get the big idea:

If you’re buying stocks right now, chances are very good that, a few months from now, you’ll be glad you did...

Good investing,

Steve