And for retail investors. Guys, you are always wrong. As Jeremy Warner pointed out, there is a terrible negative correlation between retail buyers being bullish, and the market’s subsequent performance. I don’t want to sound like a paranoid Marxist, but there seems to be something almost systemic about it:
- Rising markets don’t generate headlines until a long way into the rise. Then they are euphoric – glowing profiles of genius CEO’s, and so on
- Information dribbles out more slowly to the retail punter than the City insider, so they react more slowly to bad news. So they wait for an accumulation of buys, which means buying higher.
- Retail punters need the ‘comfort’ of a large herd of similar people, who take similar views. Better to fail in company than alone . . .
- Falling markets produce shock headlines that affect the risk-aversion of retail people. So in April, you are still digesting the bleak stories of Feb-March, even though that is when to buy.
I saw this over and over again in the Dot Com madness. I even wrote a clunking satire on the process, which is still by far the most recommended post in the “investment psychology” section (no, I didn’t have a life, for a few months).
John Authers today pointed out how extremes of sentiment are negative indicators:
Another great contrarian indicator is the survey of sentiment by the American Association of Individual Investors. Last week, this showed the lowest proportion of self-described “bears” since February 2007 – when volatility first started to spike as investors at last began to grasp the severity of the subprime mortgage crisis in the US. Bearishness in this survey hit an all-time high in March last year when the current rally first started, showing how much money can be made by betting against extremes of sentiment.
The result, as investopedia tells us, is that private punters are way worse than the market index. They buy high, sell low. This has very worrying implications for liberals believing that leaving people to their own devices tends to maximize their own interests:
In 2001 Dalbar, a financial-services research firm, released a study entitled Quantitative Analysis of Investor Behavior, which concluded that average investors fail to achieve market-index returns. It found that in the 17-year period to Dec 2000, the S&P 500 returned an average of 16.29% per year, while the typical equity investor achieved only 5.32% for the same period – a startling 9% difference!
Like Dillow, I think markets are unpredictable. But the best rule is: if you meet anyone in a pub with a clever stock tip, sell everything.*
*then what do you make of this post? Is it a negative negative indicator? If anything is obvious, it is probably wrong . ..