Thursday, January 24, 2008


This morning, Don Hays sent subscribers an update to his "Lessons From the Past" article. Don is an old, successful, investor.

His numbers show that the AAII indicator has leaped to the highest level ever with two exceptions, one in August of 1990 and the other in October 1990. Individual investors are now bearish over bullish 2.5 to one. If one backs off to 2 to 1, one can find 23 instances of such extremes. In those instances, the market was up 23 out of 23 times over the next 12 months. The average big stock was up 21.75% in those 23 instances.

Yesterday, a reader asked me if it would be possible for the market to have a major decline from here. My response was that a great depression is always possible but highly unlikely. He asked for the probability of making money from here. I think the above statistics are a powerful answer. One can honestly say that in all cases where the public is willing to sell at any price, prices have proven to be very cheap indeed.


Don went on to give the readings of great indicators that are at extreme levels. The arms index has reached 3.0 only 4 previous times, which included October 19, 1987 and March 10, 2003. I very much enjoyed the market results after those two events. The average 12 month return was 24%.

Don listed other indicators but the granddaddy of them all is the IBES valuation indicator. This is simply the stock /bond yield ratio. It has never, ever, been at such extreme levels in my life. Yes, this is one of those events that you look back on for the rest of your life and say "boy, I wish I had sold my house to buy stocks back then" or boy I could have made $20 million dollars had I bought aggressively back then. Since there are no other readings at current levels, we back off to the second highest reading of all time to discover that the average big stock was up 30% 12 months after the reading.

If the average stock is up 30%, the average stock fully margined would be up 150% and many stocks will be up several hundred percent without margin. I have lowered the asking price on my home by $10,000 in the hope that I can sell it quickly enough to invest in stocks! In full disclosure, my new home is supposed to be ready in a few months so a portion of the proceeds will be needed to buy the new home.