View markets without emotion
When markets move to extreme levels, smart investors often make their largest portfolio gains. Warren Buffet once said, “Be fearful when others are greedy and be greedy when others are fearful.” Managing our finances would be far easier if we could view markets like a machine void of emotion. But, we are human and our powerful emotions often move markets to what some may consider extreme levels; creating opportunity for those with nerves of steel and a trusted investment plan.
Sentiment data, which is derived from surveys of individual investors, money managers, or newsletter writers, can provide insight into the human emotion that drives capital markets. It’s a mistake to think the stock market is based on a science, a large part of what moves stocks on a daily basis is human emotion. According to the latest survey data from Investor Intelligence, 55% of investors are bullish – the highest reading in over two years. As always, no data set can be viewed in a vacuum, and no investor should rely on a single data point. But this information helps those that are active in the market get an idea of the human emotion that has been impacted during the recent market advance.
The stock market in its simplest form is one big voting box. Each time you buy or sell a stock, bond, ETF, etc. you are casting a vote. Even holding cash is a reflection of market participants casting their votes. History tells us we should view this data in a contrarian manner, taking the opposite action when data is at extreme levels. Meaning the larger the crowd that shares a single viewpoint, the more likelihood the crowd is wrong. This isn’t always the case, but if you have too many people on one side of the teeter totter, it just won’t work until it is rebalanced.
On March 5, 2009, the American Association of Individual Investors reported that according to their latest survey, 70.2 percent of investors were bearish on the stock market, the largest amount of bears since 1990. As you may remember, the S&P 500 bottomed the following day before rising over 60 percent through the rest of the year. Markets, whether of stocks, commodities, or real estate typically overshoot their ‘fair value’ level, however you chose to measure it. Times of panic and extreme euphoria should be looked at through a clear lens. Having a defined investment plan is vital in order to navigate the at times choppy waters of the capital markets. The investment world is more of an art form once you strip away the complexity, and when viewed in the right light it can be a beautiful thing.
Joseph “Big Joe” Clark, whose column is published Sundays, is a certified financial planner. He can be reached at firstname.lastname@example.org or 640-1524.