When the Majority Agree, They're Wrong

Much of investing is about mob psychology.Physician-investors learned that inthe late 1990s, when the best thing to doon the golf course was to pick up hot stock tips.Eventually we learned that those ideas oftensplashed into the water hazards just as fast as abadly sliced ball. You'd think thatinvestors would learn from their mistakesand stop following the crowd.

BEAR MARKET WAVES

The bears have been running out ofsteam since the big washout in July2002. Even though the averages went onto make lower lows in October 2002, theemotional bottom was clearly on July 23.The volume at the October low was halfof what it was in July. In early March,with the war in Iraq looming amid disappointingearnings and rising unemployment,the markets suffered anotherdownward thrust, though with only atiny fraction of the volume last July.

This shows that sellers are exhausted.Most of those who have held on untilnow are not willing to give up, no matterwhat bad news is in the papers or on TV. All bearmarkets experience waves of sellers. First the mostspeculative people on margin receive margin callsand, if they can't meet them, are sold out of theirholdings by the broker. The next wave occurs whenearnings slump and individual stocks becomeproblematic.

The final wave takes place when the very bestcompanies (eg, those in the Dow) are tarred andfeathered. Think of GE, Home Depot, Disney,Intel, Hewlett Packard, and other members of theesteemed Dow that dropped in half last year. Thesecollapsing stocks hurt even those who thought theyweren't speculating, but owning thevery best American companies.

Market Vane

Consider these statistics: At the bottomof the bond market on September8, 1981, a puny 15% of investors werebullish on bonds. Nine months later,on June 22, 1982, only 20% werebond bulls. Bonds began a 20-yearbull cycle, during which interest ratesdropped from 15% on 10-yearTreasury bonds to less than 5% today.Stocks outperformed bonds in about15 of the 20 years. But if you hadbought bonds then and did nothingsince, you were sitting in the catbirdseat with a 15% annual return pluscapital gains. On July 23, 2002, measured 15% of stockinvestors as bullish. On March 11,2003, that bull number had risen to21%. History is repeating itself in spades, offeringa once-in-a-generation opportunity to goagainst the grain and reposition your portfolioaway from bonds and toward stocks.

Thekey

Of investors polled in March, 84% were bullishon bonds. After 38 years on Wall Street, I canassure you that the common wisdom is almostalways wrong. That's why this is not an easy gameto play. You make the most money when you'rewilling to be a contrarian and exercise patience. : Take positions before everyone else figures itout. You'll have a better purchase price.

Following the crowd never tends to be a winningstrategy for more than a very short time. Manyprofessional investors are shell-shocked. They'reafraid to own stocks lest they lose more clients thanthey already have. They want to believe the bearsare exhausted, but they're afraid to believe it.

CONQUEST OF FEAR

Case in point

We see many investment opportunities in thestock market. Many fine companies are in the bargain-basement pile. Some pay very nice dividendsthat will exceed what you're getting with bonds andoffer the prospect of capital appreciation.Eventually, the economy will right itself. Companiesthat haven't cut back on their research anddevelopment expenditures because they had thecash to keep spending will leap forward in the nextbusiness cycle. : Intel never waivers indownturns and continually reinvents itself withnew products and cutting-edge manufacturingfacilities. There are enough Intels out there to basea winning portfolio on for the years ahead.

The rising unemployment rate tells us thatcompanies are now "mean and lean" on thepersonnel front, and so are their inventories.This is not an easy time. It requires skill and aknowledgeable advisor to avoid the many landminesstill out there.

Joan E. Lappin is presidentof NYC-basedGramercy Capital, whichhas been ranked number1 in Nelson's Directory of Registered InvestmentAdvisors.To obtain information aboutGramercy's stock selections' positive performancein 2002, please call 212-935-6909 or e-mail jlappin@gramercycapital.com.