Every bear market has these two things in common:
- they end
- Expected returns increase
The first is self-explanatory. The second thing should be obvious, but from my conversations with thousands of investors over the years, I’ve found that it’s certainly not intuitive for most people.
When I tell you that expected returns rise as stock prices fall, that’s an overly simplistic way of saying that investors only get paid for what the stock might do in the future. We get nothing for what the stock has done in the past. And history tells us that as stock prices fall, both in absolute terms and relative to their valuations, the opportunities to make money prospectively increase. It seems as though the opposite is true: losses can lead us to believe that further losses are ahead, the presence of some risk puts us on high alert for the possibility of more risk. All of this is built into our human nature and very difficult to circumvent, even if we know the science and chemistry of how it all works.
But in fact, we all know that buy low, sell high is the best strategy for investing in anything: stocks, real estate, bonds, etc. Buying low means having less risk that the purchases we make are unwise. Seth Klarman refers to this as a “margin of safety.” The investment may not appreciate in price, but the better the valuation at which I can buy it, the less risk I have that it will drop substantially in price. Therefore, buying stocks when prices are falling is less risky and leads to a higher probability of making money.
Again, it will never feel that way in the moment, but it is empirically true. You can argue with me, but I have centuries of data on my side and you would have no proof. You would have your feelings, and I guess that would be fine, but you would lose. Not only do you lose the argument, but you also lose money by betting against what I’m saying.
On Friday, the Investor Opportunity Index (IOI) hit levels we haven’t seen since September 2020. In fact, it’s up 25% year-to-date.
What is the Investor Opportunity Index? It’s something I just made up last week. I asked Michael to run the inverse of the S&P 500 and create the charts below. What you are seeing is an opportunity to invest new dollars. This opportunity is increasing. quickly
In the first graph, IOI is shown going back five years. We are in a good time to put money to work in stocks with the IOI rising rapidly.
In the second chart, the year-to-date IOI quoted in percentage terms. Yes, I know the stock market is down this year, but the investor opportunity index is skyrocketing: 
Starting now, if you’re under 65 and know you have more money to work with in your retirement and investment portfolio, I want you to think of the Investor Opportunity Index every time you see the stock market s it runs out Close your eyes and imagine the opportunity going up, up, up as the markets go down, down, down.
Reorient your mindset to the future while everyone around you reacts to the latest panic and pessimism of the present. It will keep you focused on the only thing that really matters: expected returns and tomorrow’s rewards. You’ll thank me in a few years.
