The revelation of the week in the mainstream press was the 11 people who got million dollar retention bonuses from AIG and no longer work for the company.

But the revelation of the week among financial bloggers belongs to the King of Bears, Dr. Roubini, an economist at New York University. He’s also known as Dr. Doom.

He’s been predicting for years that the economy was headed for a hard fall and that the market would get crushed.

The revelation isn’t that he’s changed his mind. He thinks there’s much more unwinding to do. He’s as bearish as ever…

The surprising revelation is that 100 percent of his savings is in stocks. Why is Roubini saying one thing and doing another?

First off, Roubini’s odd investment choice was first revealed last year in the Financial Times. So it’s not really breaking news. But the issue it raises is very timely…

Is buying and holding stocks just plain stupid? How can you be a bear and still invest?

Nobody is as bearish as Roubini. Does he know something you should know?

Let’s start peeling off the layers of the onion and see what it reveals…

First layer. The most basic fact of stock markets is that over time they go up. The caveat here is that they can be flat for a decade or more.

Second layer. The investments which are killing you are the ones you made while the market was peaking in 2005 through 2007 and you were buying stocks at their peak.

Your more recent stock investments have been much less damaging. In fact, if you’ve been investing during the last two weeks, you caught the market while it was making a 20 percent rise. Your returns should be pretty good.

Third layer. The money you put into stocks tomorrow may see a rise or a dip. Nobody can say for sure.

But, as an investor, you should always take into account the probabilities – including downside risks and upside benefits.

As for the downside, the S&P 500 lost 40 percent in the last year. The chances of it losing another 40-50 percent are remote, especially compared to this time last year.

As for the upside, the lower the stocks go, the grater the chance of a rally. There’s a name for this. It’s called the law of small numbers.

As stock prices get smaller, there comes a point where the probabilities point to rallies. And once they start to rally from their low base, it doesn’t take much to accumulate big gains.

For example, let’s say you bought 1,000 shares of a stock which has sunk from $10 to $4. It doesn’t need to make up all or even a majority of its recent loss to generate sizable gains.

The stock lost $6. If it just makes up a third of that, you’ve made another $2,000 (or 50 percent) on your $4,000 investment.

By plugging into the law of small numbers, you increase the likelihood of participating in big money-making rallies.

Is that why Roubini is in stocks? He doesn’t say. He only explains that a lot of his income is in cash, while his savings are in stocks.

But Roubini is a very smart guy. And I don’t believe he’s a hypocrite. As a bear, he obviously thinks stock investing is a compelling strategy.

I agree. But I don’t think you have to rush into stocks. I think the market still has another major down leg to go, and once that happens, the law of small numbers should begin to work its magic.

Source: Why the Most Famous Bear Invests in Stocks