The topic of market sentiment and how it manifests in stock price shifts and investor behavior is addressed in this week’s Enterprising Investor.
In today’s post-election market, the article points out that sentiment measures have increased. “A recent Investors Intelligence Sentiment Report registered 65% bulls—not an extreme reading, but above the roughly 45% average.” The author warns, however, that such measures alone are not reliable.
“Investors should not base their decisions on psychology alone,” it says, “but they should always be assembling and updating their worldview. Paying attention to excessive sentiment is a good way to avoid overpaying.”
Long-term investors, on the other hand, might be best served to ignore sentiment entirely, the author argues. Sentiment measures attempt to “quantify an inherently unquantifiable factor.” He quotes Morgan Housel, who believes that, “Most investing is simple, but we complicate it.” Taking investment cues from sentiment measures is likened to market-timing.
The article offers the view that sensible investing starts with the assumption that companies will earn a profit, and the amount that investors are willing to pay for that profit will fluctuate. “Those emotional swings will balance out over time,” it says.
In conclusion, the author asserts that for any investor, “defining your investment goals in advance of purchasing stocks—including return targets and stated time horizon—is the best way to maintain discipline and keep emotion out of your investing process.”