"We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful." --Warren Buffett

THE ALIGNMENT IS NEARLY PERFECT FOR BUYING STOCKS (November 30, 2011): Are your friends, family, or colleagues excited about buying stocks now that they've fallen sharply during the past month? I thought not. And yet that is often one of the best reasons to buy. If you scan any financial web site or watch cable TV, gloom-and-doom stories have been predominating in recent weeks. This has encouraged amateur investors to continue their four-month frenzy of withdrawing money from equity retirement funds at roughly the same pace with which they were unloading in late 2008 and early 2009. One important difference, of course, is that stocks have dropped less than 20% this year, versus more than 50% three years ago. So why are investors so much more eager to sell this time around? The reason is puzzling from a fundamental point of view, but obvious from a psychological perspective. In 2008, almost no one could remember a severe bear market, so investors cheered a 20% loss as an opportunity to buy into a dip. Today, everyone remembers 2008, and so investors believe they are smart to sell after a 20% decline if it prevents them from losing another 30% or 40%. Since the financial markets behave to punish the greatest possible number of investors at all times, rather than because of absolute valuations, the recent unloading by amateurs ensures that global stock markets will rally significantly during the next several months.

Top corporate insiders have excellent track records in buying and selling. They have been aggressively adding to their equity holdings during the past four months near all important lows. Usually, such buying tends to subside with each subsequent low as insiders progressively exhaust their spare cash, but last week we had another intense round of purchases by insiders and an equally dramatic decrease in their selling. This is especially significant since absolute valuations today are higher than they were at most of the previous bottoms since early August 2011, as measured by the S&P 500 and other general equity indices.

Another bullish sign for stocks has been the behavior of VIX, a gauge of investors' fear which had peaked at 48.00 at the close on August 8, 2011 and has since formed a pattern of numerous lower highs. This is exactly how VIX acted in late 2008 and early 2009, as well as at previous important equity-buying opportunities. Eventually, VIX will return to the mid-teens which has repeatedly served as a sell signal; for example, VIX had bottomed at 14.27 on April 28, 2011 which was an excellent time to get out of the stock market.

Meanwhile, U.S. Treasuries remain incredibly popular. If you look at TLT, a popular exchange-traded fund of U.S. Treasuries averaging 28 years to maturity, it reached a level last week which nearly matched its all-time peak from the previous bear market. In other words, Treasuries are behaving as though we were already in a severe recession. This means that either Treasury investors know something the rest of us don't know, or else something else is going on. It is far more likely that investors who have fled equities out of fear of a continued bear market remember how well Treasuries had behaved in 2008, and have therefore crowded into this safe-haven asset in anticipation of continued gains. However, whenever everyone is jumping aboard the same bandwagon, there is sure to be disappointment regardless of the fundamentals. If the global economy continues to muddle through, even without much improvement from current levels, the anticipation of a sharp contraction will prove to be unfounded, and TLT could slump all the way back to 100 or even lower. Those who read this web site frequently know that I repeatedly advocated buying TLT near all lows from December 2010 through April 2011, but it has become far too popular to be worthwhile at the present time.

Emotionally, it is always most difficult to buy stocks when almost no one else is willing to recommend doing likewise. The shares of commodity producers and related industries in particular, including exchange-traded funds such as SLX, SEA, GDXJ, KOL, and XME, as well as European-bourse funds like EWG and EWI, remain unusually depressed and could gain more than 20% once investors realize that the apocalypse is not just around the corner. For the purpose of full disclosure, I own SLX, SEA, URA, GDXJ, and EWG, in order from the largest to the smallest allocation.