Over the past five months, world stock markets have put on a historic rally.

Since March 9, the S&P 500 is up 48%. The small-cap index, the Russell 2000, is up 65%. The EAFE international index is up 67%. And the MSCI Emerging Markets index is up 79%.

Yet five months ago, investor sentiment was black as Halloween night and equity mutual funds were experiencing massive outflows.

How did millions of investors get it so wrong?

The short answer is they didn’t know what they didn’t know. They didn’t know that the economy can’t be reliably forecast and the stock market can’t be consistently timed. They didn’t know that abject pessimism is the long-term investor’s best friend.

Why We Were Never Heading Into Another Great Depression

And, perhaps most importantly, they didn’t know that it was never likely that we were heading into another Great Depression.

Read your history. The Depression was caused by policy errors: tight money, higher taxes and protectionist legislation.

The Federal government has done a lot of things wrong since this economic crisis began. But it hasn’t been so foolish as to make the same mistakes it did almost 80 years ago.

• The Fed has taken short-term rates to zero, a powerful tonic.
• Bernanke is flooding the system with money.
• Plus, Uncle Sam is spending money like there’s no tomorrow. (Too much, in fact.)
• And there have been no trade wars with foreign nations.

Bear in mind, economic knowledge in the 1930s was like medical knowledge in the Victorian era. We’ve come a long ways since then. No one is going to bleed the economy with leeches.

The Gloom-&-Doomers See Clouds in Every Silver Lining…

Yet the gloom-and-doomers, the folks who see the cloud in every silver lining, have never understood this.

Not only have they completely missed out on the stock market’s big gains, but the highest-yielding money market in the nation yields less than 1%. Gold is stuck in neutral. And many with the strength of their convictions are holding double-short funds that have lost most – or nearly all – of their value.

These investors never seem to realize that the media delivers the world through a highly distorted lens.

When you hear five times a day that…

• The economy is in contraction
• Unemployment claims are increasing by more than 400,000 a month
• The U.S. housing market is spiraling down
• Consumer spending is anemic
• Business investment is down and credit is tight

…It’s tough to muster much confidence to buy stocks.

The Greatest Buying Opportunities of Our Lifetimes

But as I wrote in this space just one week before the market bottomed:

“Irrational exuberance is as dead as Che Guevara. And while true contrarianism is by definition a lonely business, 10 years from now this market is likely to be viewed as one of the great buying opportunities of our lifetimes. Many investors will disagree, of course. And that’s fine. As George Santayana famously said, ‘Those who cannot learn from history are condemned to repeat it.’”

It hasn’t take 10 years, of course. Or even 10 months. (Although it’s unlikely that we’ll see this bull market reach much higher levels without a few interruptions.)

Two of our core principles are:

• Number one, owning a diversified portfolio of profitable businesses is the best way to protect and enhance long-term wealth.
• And number two, the best time to buy will always be when the majority of investors are despondently selling.

Yes, these principles have served us in good stead.

That’s why we call them principles.

Good investing,

Alex

Source: How Did Millions of Investors Get It So Wrong?