(MONEY Magazine) – Imagine, for a moment, that it all happened in reverse. Starting in 1996, a savage bear market began wiping out your stocks. You lost money year after year; you were the laughingstock of the world. Just when things were at their bleakest, the market finally turned up. Your portfolio has more than doubled since March 2000, and you're ranked America's No. 1 investor. Now you know how David Tice feels.

After losing money year after year during the late 1990s, Tice--short-seller, corporate curmudgeon, America's most notorious stock market bear--is reaping the rewards of pessimism. The Prudent Bear fund, in which Tice sells stocks short (borrowing shares and selling them, hoping to buy them back later at lower prices) is up 57% so far this year, making it the country's top actively managed diversified mutual fund. Its three-year average return is an amazing 23%. And here's the scary bit: He thinks the bear market has just begun. He believes that stocks are still so overvalued that they haven't fallen even halfway to the bottom. By the time it's all over, the Dow will drop to 3000. The Nasdaq will be at 500. The economy will stumble into another long, painful recession. And the next bull market might not start for another decade.

Tice is not the only one who holds such convictions. As the market tumbles to five-year lows, even people not hitherto known for their pessimism have metamorphosed into bears. Bond market guru Bill Gross, managing director of Pimco, argues that the Dow Jones industrial average would be fairly valued at about 5000. The latest book by Robert Kiyosaki, best-selling author of Rich Dad, Poor Dad, is being advertised with the warning, "Why the biggest stock market crash in history is still coming."

After disregarding them all through the 1990s, investors suddenly are taking the bears very seriously.

And that could be a mistake.

going to meet the bear

It was a cool autumnal day in New York City when I flew out to meet Tice, but Dallas--lair of the Prudent Bear--was scorching, and the streets were half-deserted by midday. Tice's office block, 8140 Walnut Hill Lane, is a nondescript building, set so far back from the road that my taxi driver missed it on the first pass. The setting is idyllic: Glass backdoors give a view of a pond with a fountain in the center. A sign asks you not to feed the geese.

Tice's office on the third floor looks like any other money manager's, with an old-fashioned color print of the New York Stock Exchange hanging on a wall. There's just one clue that this is not your typical mutual fund office: On a wooden table right below the color print is a bear's head carved in pink stone.

The conservative office fits in well with the subdued image that Tice has been projecting recently. He repeatedly has refused to gloat at his success, arguing that it would be un- conscionable to exult while investors are losing their savings. A year ago, at the end of a phone interview, Tice told me, "I want you to include this in your story: I'm not looking forward to what's coming. I wish I was wrong. But this is how I see things."

That's quite a change from the David W. Tice investors saw during the bull market--back when they called him the "Big Bear." True, Tice was not the only one who refused to join in the fun of the 1990s. The roster of wallflowers included James Grant, editor of Grant's Interest Rate Observer. No bullish investor could match Grant's knowledge of financial history; no bullish investor could match the eloquence or logic with which Grant demonstrated that stocks were headed for a fall; and no one could match the self-deprecating humor with which he mocked himself when he turned out to be wrong, time and time again. Over in Minnesota, veteran fund manager Steve Leuthold grew so tired of warning about the rise of the Nasdaq that he set up a rival index of his own and dubbed it the "Internet insanity index." The job of an economist is to put out long, dry reports that few bother to read. But Stephen Roach, chief economist at Morgan Stanley, woke his audience up by predicting that the much vaunted "new" economy was headed straight for an old-fashioned recession. Robert Shiller, mild-mannered professor at Yale, delivered an electric jolt to tech investors with the dismal forecasts in his book Irrational Exuberance. Collectively, these men set themselves up as the opposition party to the bull market of the 1990s. David Tice just happened to be the brashest, most brazen and most bumptious of them all.

birth of a skeptic

In 1988, Tice began making a name for himself by targeting big companies in his newsletter Behind the Numbers. In 1996 he warned that Sunbeam Products was taking special charges to conceal underlying problems; in 1999 he decried "accounting intrigue" at Tyco. Somewhere along the line, his bearish calls on individual stocks metastasized into a marketwide pessimism. In late 1995, Tice launched the Prudent Bear fund, designed to "benefit from a declining stock market," according to its ads. The market, unfortunately, was rising. Tice lost 14% in 1996. The more he got mauled, the more vociferous Tice became. In autumn 1998 he was calling for an imminent decline of as much as 50%. His fund lost 34% in 1998. His response was to write, on Jan. 22, 1999, "Certainly, we have seen all the characteristics of a speculative blowoff and would expect an imminent sharp decline." In 1999 the S&P 500 gained 21%, and his fund lost 23%. In September of that year, he took the battle right into enemy territory, flying into Manhattan, the heart of the bull market, to organize a symposium at the Waldorf Astoria Hotel. The title of the symposium: "The Credit Bubble and Its Aftermath." The message: The end was in sight for the bull market. "Six months later," Tice says, "the Nasdaq peaked."

He was right at last. As stocks plummeted, the Prudent Bear fund had its first winning year in 2000--gaining 30.5%--and it hasn't lost money since. Assets are growing so quickly that Tice is thinking of closing the fund to new investors. This is David Tice's hour in the sun.

"Follow me," his secretary says, signaling me in for the interview. I wait for Tice in his conference room, and here things start to get eerie. A framed certificate on the wall proclaims:

One day the mist will clear

...For the moment, anarchy in the global financial markets masquerades as an agent of national prosperity and personal freedom... But one day the mist will clear, exposing the true extent of past follies...

A small man in a blue polo shirt and slacks slips into the room. The familiar aristocratic mustache, deep-set eyes and prominent brow tell me that I am looking at David Tice.

"A huge day for the markets," he says, shaking my hand briskly. "The Dow was down 300 points."

A sensation of dismay instinctively grips me. I wonder how much smaller my 401(k) and trading accounts are going to be when I check them that night. But the look on David Tice's face, at that moment, is one of sheer excitement. He sits opposite me, sipping from a can of Diet Pepsi.

I set a copy of the Wall Street Journal before him. Every item on the front page is a piece of bad news: stocks falling, fears of a double-dip recession, the threat of war with Iraq. I speculate that these sound like the exact conditions that constitute "capitulation"--the point at which panicky investors drive the market to its bottom, setting the stage for a new bull market.

"Isn't this enough pessimism?" I ask. And at once I've got Tice worked up.

the show-me state of mind

Here are the facts, according to David Tice: Almost $1.6 trillion has flowed into equity mutual funds since 1990. And only since June 2002 have investors been pulling out more money than they put in. Frowning hard until he etches a deep furrow into his brow, Tice stares at me.

"Nobody has sold," he says. "Is that capitulation?"

For Tice, the idea that stocks have bottomed out simply because they've fallen 41% since March 2000 (as of late October) is a symptom of the basic problem facing investors today: a nationwide deficit in skepticism. And David Tice wants you to know that he is, above all other things, a skeptic. His twangy midwestern accent softens as he wistfully points out the roots of this skepticism: his upbringing in Missouri, the "show-me" state.

Skepticism is a profitable business for Tice. Some 200 clients pay $15,000 a year for Behind the Numbers, where Tice--with the help of his 14 analysts--highlights stocks that he thinks are headed for a fall. In addition to the Prudent Bear, Tice runs the Prudent Safe Harbor fund, for which he buys gold stocks and foreign government bonds on the assumption that they will benefit from a decline in the dollar. In all, the firm manages $542 million.

To understand what gets Tice and his 14 bloodhounds on the trail of a stock, let's take a look at Tyco through their eyes. Here, says Tice, was a company operating in relatively slow-growth businesses that was somehow expanding its earnings dramatically. Tice got curious. His analysts combed through Tyco's financial statements, and Tice concluded that the highly acquisitive company was using acquisition-related write-downs to create the impression that its earnings were stronger than they truly were. Even now, he can rattle off the numbers that convinced him of the case against Tyco: The company was paying an exorbitant price of three times sales, on average, for the businesses it bought. Its merger-related goodwill was rising 14% a quarter, year after year. Such painstaking attention to numbers has earned Tice grudging respect from the financial community: Within weeks of his attack on Tyco, its share price dropped by 40%. And that's why people are sitting up and taking notice of the latest forecast issuing out of this idyllic Dallas office: The one that says the Dow is headed for 3000.

the worst is yet to come

You've got to have a sense of stock market history, Tice says: "When there's a mania like the one we saw over the past five years, you tend to have an 80% to 90% decline." After the crash of 1929, for example, stocks fell 86% from their peak. Once the bottom is hit, stocks often trade at single-digit price-to-earnings ratios--in 1974, they traded at seven times earnings. Currently, they trade at 20 times earnings. True, even in a big bear market, Tice thinks some stocks will rise; that's why he's got some long positions in his fund, mostly in microcaps. But mainly he is shorting stocks in the segments of the market he believes are the most overvalued--tech, biotech, telecom, personal-computer makers and semiconductors--and buying gold-mining stocks in the belief that bullion will rise as the economy slides. "It's a train wreck out there," he says, sweeping his arms about.

And Tice isn't done doling out the bad news. Not only will stocks fall sharply, but they'll stay down a long time. Again, it's a matter of history. For most investors, the history of the stock market comes down to an image we've seen in our brokerage office or in the pages of MONEY--a big chart of stock prices, shown in the form of one glorious upward-moving line. Far below are two anemic lines, representing the returns of bonds and cash. The message: Stocks always win the race.

Tice looks at the same chart and sees something else. He points out that most of the wealth that stocks generated in the 20th century was created in three long-term, or "secular," bull markets: 1921-29, 1948-66, 1982-2000. In between, we had two long-term bear markets. "We started a 17-year secular bear market in 1929," he says. "That was followed by a 20-year bull market, by a 17-year bear, followed by an 18-year bull; 17-20-17-18." Tice beats it out like the rhythm of a fox-trot: 17-20-17-18. That's why he thinks that although stocks will likely bottom out in three to five years, it's possible that it could be 10 or 15 years before the next bull market starts.

Without changing any of the facts, Tice is chipping away at our cherished beliefs about stock market history. The market no longer seems like an irresistible moneymaking machine. It looks more like a Dungeons and Dragons game, where some doors lead to fabulous treasures and others to unimaginable horrors. And unfortunately, Tice thinks, investors have just opened the wrong door--the one that leads right to Dow 3000.

The bottom line is served up in classic tough-guy style: "That's why stocks make no sense for nobody."

Tice sighs and takes another sip of his Diet Pepsi.

past is prologue

When the prosecution opens its case against the future of the stock market, the first exhibit is always the past. Jim Grant, one of America's finest financial chroniclers, warns that the historical record points to a further fall in stock prices from present levels. "Extreme overvaluation is followed by excessive undervaluation," he says. "That is the tendency." In a recent article, Bill Gross argues that stocks have to come down substantially before they can resume delivering their historical return. For one thing, he thinks stocks must fall far enough to double the dividend yield on the S&P 500 from its current 1.7%. "The market needs to yield close to 3.5% before it approaches fair value," says Gross, "and that means Dow 5000."

For Tice, history is more than a matter of numbers. "You need to realize," he says, "that there is a cyclicality to human behavior, that it varies between fear and greed." That's why he's betting that the market won't stop falling until investor fear has driven it back to the abysmal lows of '74 and '82.

The problem, of course, is that history has not always been a reliable guide for the bears. Tice was wrong in setting up the Prudent Bear fund in 1995, wrong in thinking the market would decline in 1996, 1997, 1998 and 1999. Sure, he will admit he was "early" in opening the fund. But he seems remarkably unchastened by his long experience of error. After all, it's not only his market timing that might be off. Although suspicion of complex conglomerates has combined with former CEO Dennis Kozlowski's alleged personal indiscretions to drag Tyco down, no serious accounting impropriety has yet been proved against the company. "We still think Tyco falls a long way," Tice insists. And yes, he's still shorting Tyco in the Prudent Bear fund.

the truth about the 1990s

For a man who prides himself on being a skeptic, it strikes me, Tice doesn't seem to harbor much doubt when it comes to his own ideas. "Does the market have to fall dramatically?" I ask him. "Can't it just meander at the 7000 level?"

He smacks his hand on the surface of the table.

"That's not what happens in a bear market," he says. "When stocks go down, they go down."

Statements like this make you wonder: How can this man, who has been wrong so often, be so sure he's right? What makes him so maddeningly confident that stocks will fall?

Like all the bears, Tice loves talking macroeconomics. While most mutual fund managers are "bottoms-up" stock pickers who focus on their own companies and sectors, Tice's view is broader and deeper. Like a mechanic with a flashlight, he loves going down into the basement of the stock market to examine the state of the federal budget, the stability of the dollar and the current-account balance--the macroeconomic engines that provide the steam to drive company profits and stock prices forward.

He doesn't like what he sees down there. Tice is convinced that the economic boom of the late 1990s--one of the greatest bursts of wealth creation in this country's history--was largely a fraud. "The boom occurred here because of credit being out of control," he says. "We borrowed too much." The original sin took place at the Federal Reserve, where chairman Alan Greenspan kept interest rates too low in the mid-'90s, Tice contends, flooding the market with cheap capital and creating a credit bubble. Easy money encouraged entrepreneurs to start up silly dotcoms and investment banks to sell them to the public. Foreigners rushed to join in the craze by snapping up U.S. equities and bonds. Consumers maxed out their credit cards. The economy and the stock market took off.

Greenspan kept rates low because he, like a number of observers, believed that the economy was going through a productivity revolution, a dramatic increase in the rate at which workers could produce goods and services made possible by computers and the Internet. Tice doesn't buy that idea. He pointed me to recent studies that claim that the productivity growth was concentrated in computer-hardware manufacturing without having much of an impact on the rest of the economy. In effect, the bears argue, computers didn't make us smarter--we just got smarter at making computers. And now, with technology in a bust, computers and networking equipment sit in piles of unwanted inventory, while the rest of the economy chugs along at its old, lethargic pace. It's a fine mess, and Tice thinks it follows directly from what happened in 1996, when Greenspan warned about "irrational exuberance" but refrained from raising interest rates to slow the economy and the market.

But, I ask, isn't it understandable that Greenspan stood pat in 1996, since a rate increase would have brought on a nasty recession?

Tice leans in toward me. The furrow in his brow deepens. "Well, guess what?" he says. "Recessions happen. And small recessions are better than big recessions. More frequent recessions are better than long booms without recessions because they create a comfort zone where investors and businessmen get reckless. When they get reckless they take bigger risks--and it causes a bigger recession or a depression."

That big recession, Tice thinks, is now a dead certainty. He thinks we will relive Japan's experience. The horizon is filling with black clouds. The budget surpluses of the Clinton era have vanished, and massive federal deficits loom. Americans continue to import more than they export, and the dollar appears to be headed for further declines. Domestic debt is touching historically high levels. He believes that the vectors of gloom will soon converge.

what bugs the bears?

So far, though, many signs point the other way: Productivity continues to grow, unemployment has been falling, inflation is tame, banks are still sound, and the economy has grown this year, albeit modestly. Those factors plus the sharp fall in stocks have actually transformed a couple of bears--Steve Leuthold is an example--into cautious bulls. But the core constituency--Tice, Grant, Roach--is standing firm. "The economy is very vulnerable and on the brink of a new recession as we speak," says Roach. But even if the evidence of recovery were less equivocal, would the bears accept it? Sometimes I got the feeling that Tice's talk of economics is just camouflage for some deeper conviction. When he spoke to me about the excesses of the 1990s, he repeatedly got swept away by anger. "We kept borrowing," he thundered. "People got to their limit on Visa and MasterCard. They got an AmEx. They got a home-equity loan. They said, 'It's okay, we'll keep borrowing.' Now we have this real estate boom." By the end of his tirade, he was livid. "We'll pay the price of a hangover," he said. In other recent interviews, he has compared the 1990s boom to a party that was high on tequila and cocaine. The extreme character of the metaphors that Tice employs, and the vehemence with which he delivers them, makes me wonder if he feels that the excesses of the 1990s were not just economic, but moral. It's as if he believes that we sinned through greed and carelessness in the 1990s and deserve to be purged in a long, hard decade of penitence. That's when I get the sneaking suspicion that--despite his protestations to the contrary--David Tice might be eager for the bad times to start.

the carnival of excess

Even if Tice is dead wrong--even if the next bull market has already begun--we can learn from him. He's right that stock market history is filled with more areas of darkness than we like to remember. If you're into stocks, you'd better really be in for the long term. Tice and the bears are also right to remind us that underlying the world of investing terms we've grown so comfortable dealing with (P/Es and 52-week highs and lows) is a deeper, more complex world of economic terms (deficits, interest rates and debt levels) that is vital to the performance of the market. And the more we delve into economics, the more we'll see what the bears see: that there's an element of legerdemain that underpins our prosperity. We tend to think of money as something solid and real--something as good as gold--but the truth is, it's just pieces of paper whose supply is increased and reduced at the will of the Federal Reserve. Our financial system is just millions of pieces of paper, arranged one above the other by Alan Greenspan. And if he or his successors ever made a catastrophic error, the system could collapse.

But "could collapse" and "will collapse" are two different countries, and the bears weaken their arguments by regularly straying beyond legitimate skepticism into realms of morbid gloom. One of the books sold through Tice's website is Robert Prechter's Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression. After predicting a cataclysmic fall for the market, Prechter (another of the 1990s bears) strikes a bizarre note--"Look for an increased number of nuclear explosions during the bear market"--before getting lost in a fantasia of paranoid speculation. "I know people who have farmland in the country, a retreat in the mountains or a self-sufficient home. Others buy guns or learn self-defense," he writes. He also offers a list of websites devoted to disaster preparedness, air testing and dried foods. Prechter is on the fringe of the bear community, but an element of unhealthy pessimism seems to stain even the most rational, the most scholarly, of them all. Obsessed with looking backward, they seem scornful of society's capacity for producing real innovations like the productivity gains of the 1990s. They seem, in essence, to doubt our very capacity for progress. And so far, the evidence indicates that they are wrong to do so. Tice set up the Prudent Bear fund on Dec. 28, 1995. The lifetime return on the fund (through Oct. 22) is an annualized -1.29%. In the same period, for all its recent setbacks, the S&P 500 has gained an annualized 8.55%. The wheels of progress may wobble, but they roll on.

As our interview was ending, Tice pushed his Diet Pepsi aside. He wanted to make sure that I--and all the world--understood one thing about the new, subdued David Tice. "I'm sick of being bearish," he said. "I can't wait to be bullish."

"When was the last time you were bullish?" I ask.

"I'll have to admit," he says after a long pause, "I've been bearish for over 10 years."

Flying back from Dallas, I kept wondering, Could this man ever turn bullish? Somehow I doubt it. Tice's bearishness comes from deep within, from a confirmed view of human beings as weak and fallible creatures--victims of their own greed and fear--and of the stock market as the arena in which they live out these fallibilities. I get the feeling Tice will always see feckless central bankers somewhere flooding society with cheap cash; somewhere he will always see investors gorging on that cash and driving up stocks to ludicrous highs. The carnival of excess will probably never end for David Tice and the bears.