Wednesday, May 18, 2011

Surveying Small Investor Sentiment

Faithful Random Glenings reader and fellow investment manager Bob Quinn sent along some comments concerning recent investor surveys.

Bob was struck by the fact that surveys of individual investors continue indicate a large degree of squeamishness about investing in the stock market.

Although the markets have rebounded sharply since the financial debacles of 2008, a large portion of investors believe that the markets are headed for another large leg downward.

Bob - who has a passionate interest in behavioral finance - notes that that investors are always "fighting the last war".

A recent University of Chicago survey, for example, found that nearly half (!) of those survey believed that there is a significant likelihood of a 30% decline in the stock market.

And, yet, based on 60 years of data from Ned Davis research, there is roughly a 2% chance that we will see a repeat of the 2008 stock market bloodbath.

Bob was nice enough to include a recent article from Yahoo! Finance. While the article warns investors that any investment in equities will have its ups and downs, the piece also makes that following point:

Corrections will come. We may get one here soon. However, a long-term bear market isn't in the cards. The opportunities to buy into equities will be short lived. The spikes down quickly picked up by those who realize the vastness of the opportunity at hand.

In the meantime, a majority of the investment population will remain in distrust. Leaning to the right when they should be leaning left. Relying on their intuition to profit from a counterintuitive business. Not realizing that the market is now offering them a wax with their brainwash...

...The greatest bull markets of our time have risen from points where mistrust of everything Wall Street was at its greatest. This bull market is no different. It's only the magnitude of its greatness that is to be decided.

Financial Markets Hate You: Opinion - Yahoo! Finance

I would add one final point. While not minimizing the possibility of a summer stock market correction, I am still puzzled by the mass hoarding of investors into short maturity bonds in their retirement accounts, which presumably should have a long time horizon.

It's hard to get rich on 1% yields.