Investor sentiment surveys tell us that today, with the
stock market up dramatically since late March of
2020, there is widespread optimism about future
gains. When you hear that, be wary.
When markets move to extreme levels, smart
investors often make their largest portfolio gains – by
doing the opposite of the popular sentiment. 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 as if we were machines devoid of
emotion. But we are human and powerful emotions
often move markets to what some may consider
extreme levels. It’s a mistake to think the stock market
is based on science; a large part of what moves
stocks on a daily basis is human emotion.
This situation creates opportunity for those with
nerves of steel and a trusted investment plan.
Sentiment data, derived from surveys of individual
investors, money managers or newsletter writers, can
provide insight into the human emotion that drives
According to survey data from the American
Association of Individual Investors as of the end of
2020, 46.1% of investors were bullish – a pretty high
reading relative to historical numbers (26.8% were
bearish and the remainder were neutral).
As always, don’t view any data set in a vacuum, or
rely on a single data point. Human beings are
complicated. But this information helps active
investors get an idea of the human emotions that drive
the current market advance.
The stock market in its simplest form is one big voting
box. Each time you buy or sell a stock, bond,
exchange-traded fund or any other security, you cast
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. This means that 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
On March 5, 2009, the American Association of
Individual Investors survey found that 70.2% of
investors were bearish on the stock market, the
largest amount of pessimism since 1990. As you may
remember, the Standard & Poor’s 500 bottomed the
following day, before rising over 60% 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. During times of
panic or euphoria, look at them through a clear lens.
Having a defined investment plan is vital in order to
navigate the at-times choppy waters of the capital
The investment world is more of an art form once you
strip away the complexity. When viewed in the right
light – a sensible assessment of its susceptibility to
human foibles – it can be a beautiful thing.
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