The Investor Opportunity Index hits a two-year high

Every bear market has these two things in common:

1. is over
2. Expected returns are going up

The first thing 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 definitely not self-evident to most people.

When I tell you that expected returns go up as stock prices go down, that’s an oversimplified way of saying that investors only get paid for what the stocks might do in the future. We don’t get anything for what stocks have already done in the past. And history tells us that as stock prices fall, both in absolute terms and relative to their valuations, the chances of making money in the future increase. It is as if the opposite is true – losses can make us believe that additional losses are more likely, and the presence of some risks puts us on high alert for the possibility of more risks. All this is hidden in our human nature and it is very difficult to circumvent it, even if we know the science and chemistry of how it all works.

But, really, we all know that buying low and selling high is the best strategy to invest in anything – stocks, real estate, bonds, etc. Buying at a low price means less risk that our purchases will be unwise. Seth Klarman refers to this as a “margin of safety.” The price of the investment may not go up, but the better the valuation I can buy for it, the significantly lower the risk of a price drop. So buying stocks when prices are low is less risky and carries with it a higher probability of making money in the end.

Again, you’ll never feel this way right now, but it’s empirically correct. You can argue with me, but I’ve got centuries of data on my side and you’ll never have any proof. You will have your feelings, and that will be fine I guess, but you will lose. Not only do you lose the argument, you actually lose money, and you bet on what I say too.

On Friday, the Investor Opportunities Index (IOI) reached levels not seen since September 2020. In fact, it is up 25% year-to-date.

What is the Investor Opportunity Index? It’s something I just invented last week. I asked Michael to run the inverse of the S&P 500 and create the charts below. What you see is an opportunity to invest new dollars. This opportunity is increasing. quickly.

In the first graph, the IOI is shown from five years ago. We are in a very good moment to invest money in stocks with the IOI rising rapidly.

In the second graph, year-to-date IOI is shown in percentage terms. Yes, I know the stock market has gone down this year, but the Investor Opportunity Index is up exponentially:

Going forward, if you’re under 65 and know you have more money to put into your retirement portfolio and investments, I want you to think about the Investor Opportunity Index whenever you see the stock market selling. Close your eyes and imagine the opportunity to go up, up, up as the markets go down, down, down.

Redirect your mind toward the future as everyone around you reacts to the latest panic and pessimism in the present. It will keep you focused on the one thing that really matters: the expected returns and tomorrow’s rewards. You will thank me in a few years.

from San Jose News Bulletin https://sjnewsbulletin.com/the-investor-opportunity-index-hits-a-two-year-high/