The investors who make these kinds of decisions -- moms and dads, teachers and doctors -- may be great people, but they have proven themselves in cycle after cycle to be horrible market-timers. So the stunning skew in their decision making, away from U.S. stocks and toward foreign stocks and domestic bonds, could be an indication that U.S. stocks are on the verge of a period of serious outperformance.

If this sounds to you like deja vu, you are right on the mark. TrimTabs points out that when the U.S. stock market topped out in 2000, mutual fund investors had just completed a 12-month period in which they poured a record $260 billion into U.S. equity funds while yanking $50 billion out of bond funds -- loading up on exactly the wrong asset class as shares were about to plunge.

And then by the time the U.S. market hit bottom in October 2002, retail investors had gone fully in reverse, draining $25 billion from U.S. equity mutual funds and dumping $141 billion into bond funds. Whoops.

Companies and corporate insiders appear to be doing just the opposite right now. Federal regulatory data show that insider selling totaled only $240 million daily from July 20 through late last week, down almost 50% from the annual average. This means that people who actually run companies and know how well they're doing are not betting that the market is on the verge of a wipeout.

Corporate buyback activity and mergers show the same, as the market's capitalization was reduced by $567 billion in the first seven months of 2007, according to TrimTabs data, and you can add another staggering $81 billion in announced buybacks so far in August.

That includes the massive $15 billion reported by Procter & Gamble(PG Quote) last week. In other words, companies are much more enthusiastic about U.S. stocks than the public, and they are buying at a record pace that could total $1 trillion by the time the year is out.

Ready to Pounce

To be sure, there is more pain to come in the shares of bombed-out homebuilders and banks, as a constriction of lending to even the best credits in the market will crimp home sales and the vast constellation of retail that revolves around them.

But bottom-fishers are taking the view that these risks are mostly discounted by now, and that their investors pay them to make these kinds of tough decisions.

So what should you buy in these conditions? Strangely enough, I am very attracted to the companies that started it all: the private-equity firms.

Organizations such as Blackstone Group(BX Quote), Fortress Group(FIG Quote), Leucadia National(LUK Quote) and Brookfield Asset Management(BAM Quote) live for these kinds of moments, so that they can sweep in like vultures and buy assets for dimes on the dollar. These are the cream of the crop in U.S. finance, and they will beat the amateurs at their game every day of the week.

Let's focus on Blackstone in particular, which is down 20% from its initial public offering in June and down 35% from its high a few days later. Its performance in the market over its first few months is reminiscent of what happened to Goldman Sachs(GS Quote) when it went public in the spring of 1999.

After its IPO, Goldman, the undisputed king of American finance, fell 30%, from $75 to $53, amid a tumultuous summer that included the Clinton impeachment process and numerous raids on highflying technology and financial stocks. The stock then went on to advance by 100% in the next year and to quadruple in the next seven years as its undeniable strengths became better recognized and appreciated.

Outclassing the Field

By all accounts, it is run in much the same way now as when it only had $400,000 under management instead of $83 billion -- with all department heads in a regular Monday morning meeting at which every aspect of the business is discussed, and virtually anyone can veto a deal.

Although much has been made of the potential for Blackstone and its peers to suffer from the credit crisis, it's not really germane. Blackstone has been noticeably absent from the recent high-stakes, high-price bidding of the past year and has not taken on excessive debt in its deals. Instead, the credit crunch works in its favor, as it gives Blackstone managers a chance to put their limited partnership's capital to work at lower valuations than it otherwise would have seen. Also, as many top hedge funds and brokerages teeter, a company like Blackstone gets a chance to hire the best fleeing talent.

Blackstone has diversified in recent years from private equity. While that division still provides 40% of revenue, a third of revenue now comes from real estate, and a quarter from alternative-asset-management and investment-banking activities.

It's important to note that Blackstone is not just an investor and deal maker. It actually puts new managers in place at the companies it buys. This "transformation czar" creates the bulk of Blackstone's earnings by making companies better -- not just bigger -- through heavy intervention. Of all the companies in its group, we should focus on Blackstone, because its size allows it to see the best deals, and it is just now in the process of becoming a brand name along the lines of Goldman.

Figure that earnings growth will come in at about 20% per year during the next few years. Although it's really hard to value a company with so many moving parts, it looks cheap here at $24. My target is $37 in late 2009, which would be a 50% move.