When Others Are Fleeing the Bear

Maybe you know we’re in a bear market. But do you know what stage of the bear we’re in?

Courtesy of Howard Marks, chairman of Oaktree Capital Management, a Los Angeles firm that manages more than $50 billion in alternative investments, here’s an easy-to-understand and very useful breakdown:

Stage 1. Just a few prudent investors recognize that, despite the prevailing bullishness, things won’t always be rosy.

Stage 2. Most investors recognize that things are deteriorating.

Stage 3. Everyone’s convinced that things can only get worse.

The middle stage – the one we’re in now – is the easiest of the three to recognize. Identifying Stage 3 is trickier.

For example, for a few days – when Bear Stearns was heading for bankruptcy… global markets were tanking… commodity prices were down… housing was still scraping bottom… and company profits were disappearing – I thought we were just about to enter Stage 3. But then housing got a bit of good news and JPMorgan decided to buy Bear Stearns. And BOOM – just like that – the optimists were saying that things weren’t bad after all.

When investors are tearing their hair out… when no one can see light at the end of the tunnel… when a permanent bear market is declared possible… that’s when we’re in Stage 3. And not before.

The best time to invest? Stage 3, when the market is at its cheapest and is about to go up.

So how many of your fellow ETR readers will invest in Stage 3? I’d guess 5 percent at the most.

It’s incredibly hard to jump into a market when others are fleeing at warp speed. To even have a shot at it, you need to write a note to yourself right now and show it to someone you trust (like your spouse). Ask them to remind you, when the time comes, that you swore you would do this.

[Ed. Note: ETR’s Investment Director, Andrew Gordon, is the editor of INCOME, a monthly financial advisory service that uncovers income-generating stocks that promise safety (first and foremost), along with much-higher-than-average profit potential.]