Investor Behavior: A Tragic Love Story
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Investors are a fickle bunch.
They love owning stocks when the market goes up. No surprise there. It feels great! So great, in fact, that pesky details like nosebleed valuations or a lack of profitability are easily overlooked.
But the romance never lasts.
Or does it?
The American Association of Individual Investors (AAII) takes a weekly survey of investor sentiment. It recently reported that optimism about the stock market dipped below 20%. That’s the fourth dip below the 20% mark in the last seven weeks.
To put that in perspective, the survey never dropped below 20% during the entire COVID-19 market crash of 2020! I’m talking about before we had any idea when a vaccine would be ready. That was when protestors filling the streets, rioters clashing with police, and the toppling of historic monuments were a part of daily life.
Scary times. Yet, investors are less optimistic now!
We’ve all heard the adage about being fearful when others are greedy and greedy when others are fearful.
The air is thick with fear. This is one of those moments to be a greedy capitalist. But let’s not invest on a hunch. What does history tell us?
On May 19, the S&P 500 hit a new 52-week low. This doesn’t happen very often. After all, the stock market tends to go up more than down.
Investment research publisher Stansberry Research (whose work is integral to my firm, Stansberry Asset Management) analyzed market returns after 52-week lows were reached. Its data goes back to 1950. And the results should be comforting to investors who are licking their wounds.
Source: Stansberry Research.
Investing near 52-week lows, where we are today, has not been a terrible idea. Compared to the overall average returns of the stock market, you did a little better over a six-month period and lagged a bit over a one-year period. Let’s call it a wash.
What jumps out is how 52-week lows set up superior outperformance over two- and three-year periods. If you don’t have a two- or three-year time horizon, you shouldn’t be investing in stocks. But assuming you do, this has historically been a great entry point for long-term gains.
But count on investors to do the opposite of what’s good for them.
The Investment Company Institute (ICI) estimated that outflows from equity and hybrid mutual funds reached $44.7 billion over the past five weeks. Bond funds lost a staggering $89.8 billion in outflows.
Investors are abandoning equity and bond mutual funds. Now, to be fair, some of them could be hiding out in cryptocurrencies. But I doubt that.
I’ve seen this movie before. Investors are hiding out in cash (with inflation at 40-year highs!).
I’m all for having some dry powder on hand. This is a great environment to get your shopping list ready. You want cash to deploy when great companies go on sale. That’s not what I’m talking about.
I’m talking about investors in panic-mode liquidating their investments and swearing off stocks until the market feels more comfortable. Then the inevitable happens. The market soars. They wait for a pullback that never comes. They ultimately reinvest at much higher prices than we’re seeing today.
It’s a bit of a tragedy, what investors put themselves through. Their story involves loss. Abandonment. Disappointment.
But don’t feel too bad for them. They’ll eventually fall in love again, when stocks are much less attractive than today. Perhaps love really is blind.
Michael Joseph, CFA is a vice president and deputy chief investment officer at Stansberry Asset Management. He is a member of the CFA Institute’s Practice Analysis Working Body and sits on the advisory board of the Arizona Council on Economic Education. He can be contacted at [email protected]