There’s a certain appeal to being a contrarian investor. Zigging when others are zagging. Going against the herd. And when you’re proven right, it feels pretty darn good (and can pay off handsomely).
One of the first adages contrarian investors learn comes from Warren Buffett. In his 1986 letter to Berkshire Hathaway shareholders, Buffett wrote about being fearful when others are greedy, and greedy when others are fearful.
Such moments are easy to recall. Maybe you bought Bitcoin near its 2021 top, when fear of missing out (FOMO) was in full swing. Or you saw a huge opportunity to buy stocks in March 2020, during the COVID crash … but couldn’t bring yourself to pull the trigger.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Those tops and bottoms burn into our memories. But when it comes to investing around them, there’s a problem: They are rare.
It’s been nearly 36 years since 1987’s Black Monday stock market crash. From that time period up until today, the United States has had five bull and bear market cycles. That means 10 days of tops and bottoms. Over 36 years.
How are we to invest the rest of the time?
It turns out, when others are greedy, being fearful can cost you. Big-time.
How investor sentiment has changed
This is particularly important to keep in mind today, because investor sentiment has dramatically changed compared to a year ago. One way to measure this is the American Association of Individual Investors (AAII) Sentiment Survey. Every week, the AAII polls individual investors about their sentiment on the market for the next six months. Investors can indicate whether they are bullish, bearish or neutral.
The chart below shows how bullish investor sentiment has changed over the past three years. The long-term average for bullish sentiment is 37.5% (the green line), so anything above that level could be considered more optimistic than usual.
There was plenty of optimism going around in 2021. There’s nothing like reaching new all-time highs to get investors feeling good about the stock market. The party ended in 2022, and naturally, investors were less enthused.
In hindsight, it’s easy to see that this is the exact opposite of how investors should have been feeling. They felt great when stocks were about to go over a cliff. Then they hated stocks right before the market was about to take off.
Is it time to look for the exits now?
When the market seems dismal, having perspective and keeping calm can be a huge advantage. In our mid-year letter to SAM clients in 2022, we noted that investors were unbelievably pessimistic, with AAII bullish sentiment at its lowest point in 30 years. Lower than the early days of COVID. Lower than the 2008 Global Financial Crisis. Lower than the bursting of the tech bubble.
We told our clients that “the type of market pullback we’re seeing today is what leads to big gains in the future.” That has proven to be correct. But how should investor sentiment be guiding decisions in today’s market?
The contrarian in you might be thinking that with investors feeling good about stocks again, it’s time to look for the nearest exit doors. But not so fast. Investors’ bullish sentiment over the past month has averaged 40.5%. That’s only a little higher than the long-term historical average of 37.5%.
In other words, investors are only a little greedier than usual. And it turns out, when investors are feeling just a little greedy, there are usually positive returns ahead.
Sure, you might do a little better if you buy when bullish sentiment is down in the dumps. But the reality is, it doesn’t happen that often. The market goes up more often than it goes down. And as mentioned, the market going up makes investors feel more bullish.
Bull markets often end when investors have reached a state of euphoria. Today, investors are slightly more optimistic than average. And there are still plenty of bull market skeptics!
We’re certainly a long way away from euphoria. Now is not the time to be fearful. Or greedy. As we’re telling SAM clients: Now is the time to stick to your investment plan. And if you don’t have a well-thought-out plan geared toward reaching your financial goals, there’s no time like the present!
related content
- Three Investments That Put Your Money to Work With Less Risk
- Dividends Are in a Rut
- 5 Stocks Warren Buffett Is Buying (and 8 He's Selling)
- Four Random Facts and Thoughts About Warren Buffett
- The 12 Best Stocks to Buy Now
-
New RMD Rules: Can You Pass This Retirement Distributions Tax Quiz?Quiz Take our RMD quiz to test your retirement tax knowledge. Learn about RMD rules, IRS deadlines, and tax penalties that could shrink your savings.
-
I'm 61 and need $50,000 for home repairs. Should I borrow given today's rates or take a withdrawal from my $950,000 401(k)?We asked financial experts for advice.
-
Headed for the Retirement Red Zone? This Eight-Step Game Plan Helps to Avoid FumblesThese strategies help safeguard your nest egg and ensure long-term financial success during the five years before retirement and the five years after.
-
I'm a Financial Planner: This Is How You Can Get Started With RMDsThe IRS will come knocking for its share of your tax-deferred retirement savings when you hit 73, but planning ahead for RMDs will ensure you're ready.
-
How Will You Replace Your Paycheck in Retirement? A Financial Adviser's Tips on Income PlanningBills don't stop once you retire — and you can't expect your Social Security checks to cover them all. Don't risk running out of money. Instead, make a plan.
-
From Pets to Paintings: The Little Things That Can Cause Big Estate TroubleSentimental items might have little monetary value, but their disposition can cause hurt feelings. Talking about who wants what and labeling items can help.
-
The Clock Is Ticking: Take Advantage of These Retirement Tax Benefits While They LastRecent tax changes, including an extra $6,000 deduction for those 65 and older, present a golden opportunity for retirees to reduce their tax bills.
-
I'm a Financial Adviser: This Is Why Unmarried Same-Sex Couples Need an Estate PlanWhen illness or death occurs within an unmarried same-sex partnership, family members can step in and push the surviving partner out. An estate plan is vital.
-
A Financial Planner's Guide to a Stress-Free Adventure AbroadStart by looking at flight/accommodation costs, have a flexible schedule, seek out credit card rewards, prep for health issues and plan to cook your own food.
-
I'm a Financial Planner: This Is How Smart Women Can Plan for Financial Freedom Despite Life's CurveballsProactive planning and professional guidance can help to build your confidence and give you clarity when you're navigating major life transitions.
