by Gary Alexander of Navellier & Associates
The average investor too often gets it wrong. You can’t blame the
media, the government or Wall Street. We have to examine our own
tendency toward fear and greed. We sell near bottoms, out of fear, and
we load up on leverage near the tops, out of greed. The only way to
overcome our baser emotions, I fear, is to think instead of react – to
discipline our minds to take the road less traveled by most investors.
DALBAR, the Boston-based research firm, goes to a great deal of
trouble to measure how we investors behave. The latest annual DALBAR
study shows that – over the past 20 years, ending December 31, 2008 –
the S&P 500 returned an average 8.35% per year, but the average
equity fund investor netted just 1.87% a year – far less than the rate
of inflation. You can’t blame that on equity fund managers, who came
close to matching the S&P 500. Sub-par performance for the average
investor is mostly due to bad timing – selling near bottoms and buying
near tops. Bond investors did even worse (0.77% per year), far below
the average bond yields of 1989-2008. Last year, bond fund investors
incredibly lost 11.7% vs. a gain of 5.2% for the Barclays Aggregate
Bond Index. Investors under-performed the bond benchmark by a dismal
17 points.
After releasing the report, Louis B. Harvey, president of DALBAR,
said that “investors generally don’t know when to sell.” DALBAR’s
detailed annual survey, available on their Web site, adds: “When the
going gets tough, investors panic… and withdraw their assets at the
worst possible time.”
Investing Isn’t Rocket Science – It’s Harder than That
My father helped put a man on the moon 40 years ago. He was a
Boeing executive in charge of part of the team building the powerful
Saturn V moon rocket in Huntsville (Alabama) and New Orleans during the
mid-1960s. When we both got interested in investing in the late 1960s,
we read all we could find out about how to invest, expecting the
financial world to be as predictable as the flight of the moon rocket.
In the end, I told dad, “Investing isn’t rocket science – it’s
harder than that!” With a rocket, you have the impersonal laws of
physics telling you exactly what will happen, without fail. You can
even build in redundant systems to solve any conceivable component
failure. But with investing, you’re dealing with a mob, and the mob is
nearly always wrong. They will take you on a roller coaster ride, and
it takes a very disciplined investor to stay the course and refuse to
be swayed by the mob’s manic-depressive behavior.
Example: Panic Selling and Buying of Financial Stocks
The stock market is a manic crowd. After bidding up financial
stocks to unrealistic highs in 2007, the mob crucified those same
stocks in 2008 and up to March’s market bottom. Then, they piled back
in!
Even the better-run banks and the Financial Select SPDR (XLF) were caught up in this mad whiplash:
Obviously, good banks don’t deserve an 80% haircut (mob selling),
and sick banks don’t deserve a 600% bullish panic, but this is the
nature of mob behavior when it comes to a sector that runs in or out of
favor.
AAII Sentiment Poll – a Contrarian Indicator
Every week, the American Association for Institutional Investors
asks their members – among the most intelligent and well-informed
private investors in America – to complete the following sentence: “I
feel that the direction of the stock market over the next six months
will be...” Bearish, Neutral or Bullish.
Over the years, AAII investors have averaged a slightly bullish
bias: 39% bullish, 31% neutral and 30% bearish. In general, the market
rises over the decades, so their bullish bias is understandable. But
when the tally of bulls doubles the bears, or vice versa, the market
usually moves in the OPPOSITE direction.
During 2009, the bears dominated in March and July. Both months were excellent buying opportunities:
(1) In early March 2009, the AAII bearish bias reached its peak: 58%
bears to 23% bulls (19% neutral). In the six months since the lows of
March 6-9, the S&P 500 catapulted up over 55%.
(2) On July 9, there were 55% bears and 28% bulls (17% neutral) in
the AAII poll. Since setting its early-summer lows on July 8, the
S&P 500 is up over 20% since then.
Unfortunately, this is not an isolated phenomenon. Here are the
AAII poll readings during the peak of the tech-bubble of early 2000,
followed by the bottom of the market in October of 2002:
Where are we now? For the poll taken during the week of September
2-9, the AAII membership is still net bearish: 44% bears, 37% bulls and
19% neutral. Since their historic average is net 9% bull, this net 7%
bearish stance is 16 points to the negative side of the historical
average, so that’s good news for bulls.
This Week’s Poll: Let’s Beat the Odds, My Friends
In the last two weeks, we’ve polled you on the shape of the coming
recovery (the “W” won), and the likelihood of a crash in September or
October (most of you thought the market would be relatively flat).
This week, let’s see if we can do better than the AAII poll. I’ll ask
their identical question and then check back with you here in six
months to see who was right. Here’s the question (it couldn’t be
simpler):
Posted on
Wed, September 16, 2009
by Mark Simmons