{"id":35589,"date":"2013-01-21T23:37:38","date_gmt":"2013-01-22T04:37:38","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=35589"},"modified":"2013-01-22T09:41:26","modified_gmt":"2013-01-22T14:41:26","slug":"investors-are-feeling-cheerful-time-to-batten-down-the-hatches","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/01\/21\/investors-are-feeling-cheerful-time-to-batten-down-the-hatches\/","title":{"rendered":"Investors are Feeling Cheerful \u2013 Time to Batten Down the Hatches"},"content":{"rendered":"

By MoneyMorning.com.au<\/span><\/a><\/p>\n

Last week, I got a rather worrying phone call.<\/p>\n

I was asked to talk to BBC Radio Scotland about whether it was time for listeners to think about \u2018getting back into the stock market\u2019. It wasn\u2019t for a financial show either \u2013 it was a general magazine programme.<\/p>\n

Why is that worrying? There\u2019s a saying in the markets: \u2018if it\u2019s in the press, it\u2019s in the price.\u2019 In other words, if a financial trend is hitting the headlines, it\u2019s probably nearing the end of its life.<\/p>\n

So when the BBC phones up and asks if it\u2019s time to \u2018take a punt\u2019 on the markets again, just as the FTSE 100 is nearing its all-time high, you can see why I might start to fear for the staying power of this bull market\u2026<\/p>\n

 <\/p>\n

Investors<\/strong> \u2013 as a group \u2013 are awful at timing the stock market<\/strong>. They buy just as the market is about to tumble. They watch it drop all the way. When they can bear the pain of loss no longer, they bail out. Then it recovers.<\/p>\n

I\u2019m sure anyone with any experience of investment<\/a> recognises this mistake from bitter experience \u2013 I know I do. \u2018Retail\u2019 or small investors are often seen as being the most prone to this error. But that\u2019s unfair \u2013 institutional investors are terrible at timing the stock market<\/a> too.<\/p>\n

A recent academic paper has provided yet more evidence of just how terrible. It\u2019s a study by Harvard behavioural economists, Robin Greenwood and Andre Shleifer.<\/p>\n

They looked at surveys of investor sentiment \u2013 ways to measure how optimistic (bullish) or pessimistic (bearish) investors are feeling. These surveys reflect investors\u2019 actions pretty well. In other words, when investors are feeling upbeat, they put more money in stocks.<\/p>\n

But what is it that makes investors feel optimistic about stocks<\/a> in the first place? Is it because they\u2019re cheap? After all, history shows that in the long run, if you buy markets when they\u2019re cheap, you\u2019ll make more money.<\/p>\n

As Warren Buffett didn\u2019t quite put it, you want to buy beefburgers when they\u2019re doing a BOGOF (buy one, get one free) deal at the supermarket, not when they\u2019re full price. (Of course, you also want to make sure you\u2019re actually getting beef. We could stretch out into a whole metaphor on balance sheet due diligence, but I\u2019ll leave that for now.)<\/p>\n

So if we lived in a \u2018rational\u2019 world, it would make sense for investors to become more bullish as share prices fall.<\/p>\n

Of course, that\u2019s not the way it works. When share prices fall, people panic and worry that they\u2019re never going to stop. So they sell. And when they rise, people panic and think that they\u2019ll never be cheap again. So they buy.<\/p>\n

And this is just what Greenwood and Shleifer found. As Greenwood told the Wall Street Journal: \u2018Find any survey you can get your hands on, and they will all tell you the same thing. When prices are high and stock markets perform well, investors expect it to continue going up.\u2019<\/em><\/p>\n

As Gavyn Davies describes it on his FT blog, investors \u2018chase rising stock prices and vice versa.\u2019<\/em> This is known as \u2018trend-following\u2019 when it\u2019s done deliberately by share traders<\/a>, and \u2018lemming-like herding activity\u2019 when it\u2019s done by unwary small investors.<\/p>\n

In other words, investors buy high and sell low. So when everyone else is optimistic, you should be pessimistic. Indeed \u2018bullish sentiment<\/em> [predicted] abnormally low stock market returns over one and, especially, three years ahead,\u2019<\/em> notes Davies.<\/p>\n

Given that investors are currently very optimistic, this suggests you should be wary.<\/p>\n

Stick with your plan, but take profits on speculative punts<\/p>\n

So what can you do? I\u2019m not for a minute saying that you should pull all your money out of stocks. Apart from anything else, you don\u2019t know exactly when or how far stocks will correct. Markets could easily see a 10-15% drop from here without it being too significant in the longer run.<\/p>\n

But what I am saying is that you should be wary of getting carried away by everyone else\u2019s optimism. When all around you are screaming \u2018buy\u2019 and talking of the great returns to be made on this or that investment<\/a>, it\u2019s hard to keep your eye on the prize.<\/p>\n

You should already have a plan for your investing. So stick to it. Keep drip-feeding your money into cheap markets such as Europe and Japan. Keep reinvesting your dividends<\/a>. Don\u2019t worry too much about what everyone else is thinking \u2013 regular rebalancing of your portfolio will stop you from being caught out too badly by the swings and roundabouts of the market. (If you don\u2019t know what rebalancing is, read this piece by my colleague Phil Oakley: How to buy low and sell high<\/a>.)<\/p>\n

All I would say is that if you have made any short-term bets with the more speculative portion of your portfolio recently, and you\u2019re sitting on some nice gains, you might want to think about taking profits. (You know what I\u2019m talking about \u2013 the pot of money you keep aside for following \u2018make or break\u2019 share tips and the like.)<\/p>\n

And one last point \u2013 trend-following (chasing existing trends) can and does work, as long as you get in and out on time. As Davies notes on his FT blog, they have struggled over the past couple of years, but their long-term track record is good.<\/p>\n

However, you shouldn\u2019t try to time the stock market in this way yourself \u2013 it\u2019s incredibly difficult and time-consuming and if you have a full-time job, you won\u2019t be able to do it. This is one area where I\u2019d let the experts do it for you.<\/p>\n

John Stepek
\nContributing Writer, Money Morning<\/em><\/strong><\/p>\n

Publisher\u2019s Note<\/em>: This article first appeared in MoneyWeek<\/a><\/em><\/p>\n

From the Archives\u2026<\/em><\/strong><\/p>\n

Here\u2019s Another Reason to Buy Gold at the \u2018Bottom\u2019<\/a>
\n18-1-2013 \u2013 Kris Sayce<\/p>\n

CBA Shares Priced for Perfection<\/a>
\n17-1-2013 \u2013 Kris Sayce<\/p>\n

Will Germany\u2019s \u2018Gold Grab\u2019 Send the Gold Price Higher?<\/a>
\n16-1-2013 \u2013 Murray Dawes<\/p>\n

Why Coking Coal Could Out Perform Iron Ore<\/a>
\n15-1-2013 \u2013 Dr Alex Cowie<\/p>\n

This Blue-Chip \u2018Secret Signal\u2019 Says Buy Resource Stocks Now<\/a>
\n14-1-2013 \u2013 Dr Alex Cowie<\/p>\n

\"\"<\/a> \"\"<\/a> \"\"<\/a><\/div>\n

\"\"<\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au Last week, I got a rather worrying phone call. I was asked to talk to BBC Radio Scotland about whether it was time for listeners to think about \u2018getting back into the stock market\u2019. It wasn\u2019t for a financial show either \u2013 it was a general magazine programme. Why is that worrying? There\u2019s … <\/p>\n

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