Dear Ma, Dear Pa: Welcome Back ... Watch Your Back

“The markets can remain irrational longer than you can remain solvent.”
—John Maynard Keynes (supposedly)
“Be greedy when others are fearful and fearful when others are greedy.”
—Warren Buffett
“Past performance is not necessarily indicative of future results.”
— Fidelity, T. Rowe Price, J.T. Marlin Securities, et al

Interpolated somewhere among these maxims is the angst and avarice of diving back into the market now, following a 200 percent total return from the lows nearly five years ago. For better or worse, it seems as if Mom & Pop are back, my colleague Charles Stein reports. The handful of you keeping score at home know that the Dow Jones industrial average just cracked 16,000—paging Brian Williams and Scott Pelley—with stock funds taking in just under $175 billion in the first 10 months of the year, their most since the fateful year 2000. This comes after a good half-decade period that can perhaps best be described as the Great Evacuation from equities. And it comes as bonds, the beneficiary of a fetish-like $1 trillion of inflows during said Evacuation, clinch their first annual loss since 1999.

What happens if this all this fickle money comes as a deluge back into the market? Is it all necessarily a sell signal? Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co., warned clients in a letter last week of a “third in the series of serious market busts since 1999.” BlackRock chief Larry Fink, who lords over $4 trillion in assets, predicted this month that stocks may fall as much as 15 percent due to political risks in China, Japan, France, and the U.S.

“I’m pretty modest,” volunteers Joshua Brown, a New York-based financial adviser at Ritholtz Wealth Management who blogs as the Reformed Broker. “But I predicted this.” He says investors have been down for so long that people forget that the investing masses were buying throughout the 1980s and ’90s. “People making more than they can spend, with, say, 40 years of living ahead of them—they are supposed to be buying stocks, not plowing $1 trillion into bonds. This is what they’re supposed to do, and it’s not reflexively indicative of a mania.”

Indeed, based on historical patterns, Mom & Pop’s reunion with stocks may not be as bearish a contra-indicator as widely believed. According to Investment Company Institute numbers going back to 1984, annual equity mutual-fund flows turned positive in 1989, preceding market gains in eight of the next 10 years, and in 2003, after which the Standard & Poor’s 500-stock index rallied for more than four years.

Still, the Obama bull run has left investors as a group with an unusually high allocation to equities, at 57 percent, according to Vanguard, the world’s largest mutual-fund company. Equity exposures were higher only twice in the past 20 years: during the dot-com-bubbled late 1990s and just prior to the 2007-2009 global financial crisis.

So you can pretty much bend the stats to the contours of your worldview—bullish, bearish, or meh.

In the interest of full and fair disclosure, and before the Securities and Exchange Commission comes knocking, I’m divulging what may have just been a Joe-Kennedy-shoeshine-boy moment: Both Mom and my mother-in-law asked me about shares of Tesla, which have soared 265 percent this year.

Be scared, Elon Musk. Maybe even very scared.