The Dumb Money Is Finally Starting to Smarten Up
All the behavioral coaching by index promoters urging retail investors to focus on the long run seems to have worked. But at what cost?
Small investors may have finally learned some valuable lessons.
Photographer: Johannes Eisele/AFP/Getty Images
Shoppers heading to their local mall to buy socks would generally buy fewer of them if they found that prices had, say, doubled. Investors are the opposite of shoppers. They tend to get excited by higher prices for financial assets. If prices of stocks double, it is likely that investors will want them more. And the more they go up, the more investors tend to want them in a phenomenon known as “fear or missing out,” or “FOMO” for short.
That’s why measuring investor sentiment is so crucial. Analysts have built sentiment indicators for a wide range of financial assets, not just for stocks. Lots of Wall Street types don’t like them because they’re not an exact science, but it has always been my belief that sentiment analysis works better at predicting future market moves than either technical analysis or fundamental analysis. Probably the best-known is the survey conducted by the American Association of Individual Investors. And although it is flawed, it still works at the extremes.