Editor’s Note: Over the past five months, several stock indexes across the world have pulled off a dramatic 180-degree turn. From the depths of despair in March, we’ve seen the markets rack up some impressive gains. Investment U columnist Alexander Green explains how investors missed it and how, by remembering one key philosophy and two core principles, you can reject the mainstream media’s “glass half-empty, it’s the 1930s Depression all over again” outlook and enjoy greater investment success.

Martin Denholm, Managing Editor, Smart Profits Report

A Five-Month “Fun Run” For Stocks That Fooled Investors

Over the past five months, world stock markets have put on a historic rally. Since March 9, for example…

• The S&P 500 is up 47%.
• The small-cap Russell 2000 index is up 63%.
• The EAFE international index is up 67%.
• The MSCI Emerging Markets index is up 71%.

But just five months ago, investor sentiment was as 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 this: 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 a long-term investor’s best friend.

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

Here’s what is really going on…

The 1930 Depression vs. The 2008/2009 Recession

Read your history and you’ll see that the Great Depression was caused by policy errors: tight money, higher taxes and protectionist legislation.

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

The Fed has taken short-term interest 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 we haven’t had 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 way since then. No one is going to bleed the economy with leeches.

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

Apply The Santayama Philosophy To Your Investing Mentality

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.

For example, time and time again, we hear the same news: The economy is in contraction… unemployment claims are increasing by more than 400,000 a month… real estate is spiraling down… consumer spending is anemic… business investment is down… credit is tight. It makes it tough to muster much confidence to buy stocks.

But as I wrote 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).

Stick With These Two Core Principles To Boost Your Investment Success

Two of our core principles are…

1. Owning a diversified portfolio of profitable businesses is the best way to protect and enhance long-term wealth.
2. The best time to buy will always be when the majority of investors are despondently selling.

These principles have served us in good stead. That’s why we call them principles.

Good investing,

Alexander Green
Smart Profits Report