early 2007 the valuation of stocks, particularly large-capitalization equi-
ties, was near its historical average, and many hedge funds were bid-
ding well above the market for large, publicly traded companies.
Despite the bursting of the bubble and the success of nontraditional
investors, many individual investors ignored these bears and retained
their long-term faith in stocks as the best long-term investments. Data
collected by Robert Shiller of Yale University confirmed that despite the
severe bear market of 2001 to 2002, as of January 2007, three-quarters of
investors believed that stocks were the best long-term investment.^37
And with good reason. Stocks have returned a very healthy 15 per-
cent per year measured from the market lows reached in October 2002
through the end of 2006. By 2007, stocks as measured by the popular
capitalization-weighted indexes were at or near all-time highs, having
recovered all their losses sustained in the bear market.
The bull and bear markets of the last decade were no different from
the bull and bear markets that preceded them. As stocks rose, the bulls
came out of the woodwork, and at the top they fabricated theories that
would support even higher prices. In the subsequent down markets, the
bears would pounce with justifications for even lower prices. Nearly all
would discard the long-term historical evidence that supports the case
for equities. How can investors avoid these fickle prognosticators and
accurately assess the future returns on the market? This is the topic of
our next chapter.CHAPTER 6 The Investment View of Stocks 91
(^37) Robert Shiller, Yale School of Management Stock Market Confidence Indexes, http://
icf.som.yale.edu/confidence.index.